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Let the equity market find its own level
By Salman Siddiqui
KARACHI: Restoring previous mechanism of applying lower circuit breaker
of 5 per cent or Re1, whichever is higher, was an appropriate and timely
decision of KSE Board of Directors, said Farrukh H Khan, Chief Executive of BMA
Capital Management in an exclusive interview to The News here on Thursday.
He added that the amendment in shares transaction law was made in accordance
with the terrible situation at local bourse for preventing it from registering
further battering.
He, however, was of the firm belief that let the equity market find its own
levels itself. If the buyers and sellers agree at a price then let the deal get
concluded, he said adding that it would be much better.
As far as the decline of more than 500 points on Wednesday is concerned, he said
that there were a number of reasons which transformed technical correction into
panic selling.
One should not blame any single factor for the persistently deteriorating market
but view it in a historical scenario. Market started crumbling after hitting the
historical peak of 12,273.77 on April 17 and restored well below 9,000 points,
he added.
In the initial weeks, he said, it was obviously technical correction that
dragged market into the red, but very soon technical correction converted into
panic selling, as at that time the oil prices hiked to historical levels putting
question mark on economic growth.
Investors at the time of rising index to highest level took increasing oil price
very positively and invested in oil exploration and production companies and
other scrips to make smart profits. But the fact was that rising oil prices
widened the country’s current account deficit that put a big question mark on
growing economy.
The increased oil prices also increased the cost of doing business as well
making investors scared of gaining lower profits than last year.
He maintained that Karachi stock market is one of the parameters to gauge the
economic growth and performance. Therefore, fears of economic growth getting
sluggish from fast compelled investors to cut down their holdings accordingly,
he added.
This particular reason blended with other factors that included SECP
investigation in KSE, doubling of Capital Value Tax (CVT) on shares transaction
from 0.01 to 0.02 per cent and doubling of withholding tax on brokerage houses
from 0.05 to 0.10 per cent, played havoc at KSE.
Khan said that the sum of doubled CVT and withholding tax charge is becoming
equal to the broker commission resulting in bearish spell and panic selling.
From this point, margin calls started coming and bearish spell converted into
the forced selling, as those who work in leverages are bound to pay back the
borrowed money, he said and added that for this reason, investors in leverages
have to off-load their holding at the lowest possible prices that witnessed
lower circuit breaker at five per cent on last Tuesday, 10 per cent on Wednesday
registering historical set back of 547.93 points to 8,766.98 level. Another
factor behind outflow of investment from equities was hike in interest rates
across the world and in Pakistan. He told that US Federal Reserve, European
Central Bank, and Bank of Japan are now oriented to hiking interest rates, and
consequently world stock markets fell quite fast.
He urged institutions and individuals to come in the stock market to invest for
long-term and avoid day to day speculative trading.
Farrukh H. Khan was of the view that Continuous Funding System should be phased
out and simultaneously Margin Financing System be phased in to provide more safe
and sound financing mechanics for those who want to play with the borrowed
money.
He added that CFS has ability to manipulate the stocks market where Margin
Finance System does curb this factors and one cannot buy shares over to his
personal financial capacity.
Source:
The News (16
June 2006)
