'Floor mechanism' drags stock market down

LAHORE - The stock market, following the 'freeze on market floor', continued to witness poor performance and the KSE-100 index remained relatively flat, fluctuating near the dividing line.

Dealers said that this was mainly the result of the floor mechanism that was put in place last week and the subsequent lack of investor interest. Post elections a relief rally may ensue. However such a rally, in the absence of any announcements related to the SOF or larger financial GCC package, would be short-lived.

The persistent political uncertainty in the country, the weak macroeconomic fundamentals such as constant rupee depreciation against world's major currencies, and attitude of the investors in view of the awaiting presidential election contributed a great deal towards restraining the market under tight pressure.

After the regulators decided to implement a price floor on shares trading on Aug 27, 2008, very little activity was witnessed at KSE this week.

Although the market gained 134 points or 1.5 per cent, average daily volume in the week made a 9 week low to stand at 22.8 million shares, down 67 per cent WoW. Volume in the futures market averaged 1.8 million shares depicting a WoW fall of 90 per cent.

CFS investment stood at Rs18.1bn, up by 3.2 per cent WoW. Similarly, CFS rate stood 17.7 per cent vs 16.6 per cent, previously.

A meeting of 200 KSE members has been called on Sep. 8, 2008 to discuss prevailing market condition. Followed by that KSE board will meet to review the price floor mechanism on Sept 9, 2008. KSE imposed this floor in order to provide a breather to the investors; however this measure was not liked by certain sections in the local as well as foreign community. Economic numbers further deteriorate Worsening balance of payment situation continued with its pressure on the forex reserves which fell to US$9.13bn, more than 5 year low. That is why Pak Rupee weakened last week to touch intraday low of Rs77.4/US$ amid speculation that Pakistan needs IMF funding to avoid default on its upcoming euro bond payment slated for Feb 2009. Given the current balance of payment situation, urgent need for foreign inflows is a must as import cover has fallen to 7 year low of 11 weeks. However, progress on the much awaited Saudi oil facility and US$1bn ADB loan has been relatively slow with no official announcement to date. Moreover, there have been news reports in recent days of a potential downgrade by international rating agencies such as Moody's and S&P.

On Monday, the market witnessed a volatile session with the KSE-100 index ranging from 9,189.40 to 9,215,70 intraday high & low respectively mainly due to lack of interest of investors. The KSE-100 index closed in the positive at 9,210.15 points.

On Tuesday, the market witnessed another dull session with record volumes, closed at 9,229.51 points, with a gain of just 19.36 points. The market again observed a volatile session on Wednesday as the index only gained 9.64 points to reach 9,239.15 levels.

The KSE-100 closed fractionally plus at 9,239.26 levels on Thursday, up 0.11 points.

On Friday, the market remained sluggish but just an hour before the market closed the index gained 102.93 points to reach at 9,342.19 levels. The average daily turnover declined by 67.5 per cent to 22.78m compared to 69.64m registered last week.

During the week, oil prices moved lower this week after exaggerated worries about hurricane Gustav damaging Gulf of Mexico oil facilities were thwarted. Oil dropped over USD6.0 a barrel on Tuesday moving below the USD 110 mark after over three months. Over the near term oil prices have decline by more than 25 per cent from its all-time high.

This is positive development for the Pakistani economy as it will help contain the import bill, reduce inflationary pressure and limit FX reserve depletion. Moreover the price differential claims that the government owes to oil companies should further reduce easing the pressure on the budget deficit.

Our calculations project that with oil at current levels, international petroleum prices which have already eased substantially will reduce further and bring the oil subsidy within the governments targeted level for 2008-09.