Stock markets across the world are having that déjà vu feeling; fears of that dreaded fall of 2008 mount as the world frets over the possibility of a second round of recession in the US.
"Its not just that the threat of a double-dip recession has become very real. Its now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery," the Nobel laureate Paul Krugman wrote in The New York Times last week.
Topping that, the Standard & Poor downgraded the US rating for the first time ever. Though the US Treasury Department contests that view, the rating announcement comes at a time when markets are already reeling with despair.
At home, KSE investors are also suffering from a déjà vu. The benchmark KSE shredded 6.7 percent last week - its biggest weekly fall since late February, just before the market started consolidating.
Much of that weekly decline came on account of the markets axing behaviour on Friday that saw 471 points lopped off the index - its biggest single-day loss since mid-July 2008.
There was some short covering at lower price levels on Friday, with about 32 million shares bought after the KSE-100 plunged to its intraday low of 11,300 (down 545 pints) - enabling the benchmark to recover around 75 points by the session that ended at 11,375 index points.
Total volume on Friday stood at 92 million, against an average of 41 million shares since July, and the last six months average of 58 million.
This weeks movement will be critical to assess the future direction of KSE-100. The index has already knifed below its 200 daily moving average (DMA) - one of its key support levels, and is already too close to its 300~DMA.
If the index does not find support around these levels, then as Qasim Anwar, Technical Analyst at AKD Securities says, "KSEs correction could extend to 10,400~10,700 points", the mid-point of which is roughly the indexs long term support level of 500~DMA (of around 10,557).
Will the market really crash up to that point?
For a cautious bull, like the prominent broker Arif Habib, "its a good time to go for selective buying - some key stocks in cement and fertiliser." Habib suggests ignoring the oil and gas exploration and production stocks on account of weakness in global oil prices.
On the other hand, fund bosses like Amjad Waheed of NAFA don think that the recent slide will bring mutual funds on the buy side of the KSE counter (see table).
"Ninety percent of mutual funds are currently parked in the money market and the re-routing of funds to stock market is not likely to take place; fund managers are going to wait and see till the dust settles," said Waheed.
But both these pundits agree that the market seems to be overplaying the fear that foreign investors are leaving KSE on account of fragility in global markets.
Foreign portfolio investment inflows (FIPI) have been little or negative since February, which means that weaknesses in global or regional stock markets is not the only driver of FIPI inflow/outflow.
In fact, during the last week, when the fall in both KSE and global markets was sharper than the week before, FIPI inflows were positive. NCCPL data show that after selling profusely in June and July foreigners bought $4.66 million worth of equities in the first week of August. Even on Friday, FIPI was marginally positive with an inflow of nearly half a million dollars.
The real problem, therefore, is that after failing to break through the range they were caught in the last six months, KSE equities started to feel the inequity; for all the so-called "attractive valuations," nobody seemed to buy them.
Market men attributed KSEs range bound behaviour and low volumes to a lack of leverage, complicated CGT rules and high interest rates. That in itself was an amusing argument considering that all these three conditions existed between June 2010 and mid January 2011, a period that saw market rise about 30 percent.
Even if one agrees that these conditions perhaps needed to be relaxed for further northward movement, what then explains the markets failure to react to introduction of MTS, relaxation of CGT rules and a cut in discount rate?
Last weeks reaction shows that the word from the market is clear: investors have not been in the mood to take further risk, and global fears, that of US in particular, have just given an excuse to undergo a correction that was long overdue.
The real troubles hovering on investors minds is Pakistans fragile relationship with the US, the Pak-IMF relations, the fears of a weakening balance-of-payment in the wake of falling capital account, and of course domestic politics that has left scores dead in Karachi.
And since these conditions are likely to exist for a while, investors might do well to start reading How to stop worrying and start living, while their screens turn red.
=============================================================
Net Investment Inflow/Outflow
=============================================================
$ (mn) Jan-July CY11 July CY11 Aug CY11 *
=============================================================
FIPI 0.52 -29.67 4.66
-------------------------------------------------------------
LIPI - key components
-------------------------------------------------------------
Companies -34.47 -27.08 1.41
Banks/DFI 91.62 11.65 -11.61
Mutual Funds -26.86 1.63 -1.60
NBFC 1.97 1.02 1.24
Individuals -56.16 39.06 3.41
-------------------------------------------------------------
Source: NCCPL (*) To date
=============================================================
Comments
Comments are closed for this article.