KSE led by headless bulls?

These days, there is a growing investment fallacy at the Karachi Stock Exchange; a fallacy that the margin trading system will act as the panacea of sorts.
"The MTS would bring the much-needed liquidity into the market, and that would help us (KSE) get included in the MSCI index, thereby attracting even more foreign inflows" Aqeel Karim Dhedi, a senior KSE broker, told BR Research.
Dhedhi is not the only bull in the market; Arif Habib, another seasoned broker, says he sees the benchmark KSE at 12,000 points by December, a growth of 20 percent from current index levels.
Other voices in the market are relying on post-flood economic recovery, textile boon in the wake of greater trade access to the European Union, infrastructural rebuilding on the back of aid inflows and of course the so-called attractive valuations based on cheap price-to-earning multiples.
On the face of it, all this sounds too exciting to ignore. But here is the thing: if the lack of margin didn prevent the KSE-100 from rising nearly 80 percent (or 4600 points plus) between January 2009 and April 2010, then why would the absence of leverage thwart a growth of another 10-20 percent.
And if the Pakistani investors really think the market is attractive at the moment, why did they remain net sellers on the KSEs two recent corrective moves seen between mid-April and mid-June, and end-July to end-August. If the locals were real bulls, then they would have capitalised on lower price levels.
As discussed earlier in these columns, valuations work when the economy and, consequently, the firms performance can be forecast for the foreseeable future, which in turn requires credible information.
Faced with lack of information, the market can simply move on; and no wonder why the KSE-100 has been stuck in a broad range of 10500-9400 points since mid April.
This is akin to a driver stuck on the Karakoram Highway on a hazy monsoon morning. He doesn know if there is a landslide, or if there is going to be a landslide, for the view is unclear. And so, he is just sitting back, hoping for things to resolve.
The only trouble is that he is hoping in vain, at least from the current look of things.
It appears that fiscal and governance reform is the key to ensure low inflation and low interest rates, to lessen the reliance on foreign debt and aid, to resolve energy woes and therefore ensure smooth functioning of the economy. All of this seems too much to ask from the current set-up in Islamabad.
This brings up another twist in the saga; political uncertainty. Arif Habib says, that over the years investors have become immune to political uncertainty and that it is already pretty much discounted in the prices. Knowing, KSE historical politics-led gyration, such immunities can be easily turned into deficiencies, if and when the political imbroglio gets heated up.