Karachi stocks in downward spiral as investment dries up

Islamabad: Pakistan's main stock market, the Karachi stock exchange (KSE) ends 2008 on a note significantly lower than its performance during the previous five years.

After witnessing huge growth, thanks to robust investment activity, the KSE is about to end a dramatic year where the market slid drastically downward.

For the moment, there is little end in sight to a weak outlook for the stock market which plummeted after Pakistan's main stock market regulator known as the Securities and Exchange Commission of Pakistan or SECP, stepped in to the fray and removed a floor introduced earlier by the KSE's management.

The floor was meant to block the KSE from falling below the level it stood at in August this year.

In retrospect, the floor mechanism was a bit of a blunder, given that its existence ultimately brought massive volumes of daily traded shares down to almost negligible levels showing sharply dried up investor activity.

With volumes down to record lows, it was clear that the KSE's representative 100 index was struggling to find its own comfort level, which may be the new basis for future growth for the Karachi stock market.

Lessons learnt

At the end of 2008, there are at least three inter-linked lessons learnt from the past year.

First, it is probably essential for top brokers, investors and stock market officials to combine forces in keeping a stock market fund which can intervene during periods of crisis.

This is all the more essential at a time when the stock market has faced mounting pressure as many investors decided to leave the KSE.

In contrast, the availability of a fund of some kind could be an essential tool to intervene in the market to help provide stability.

In the past few months, there has been much talk of establishing such a fund with the support of the government and key financial institutions.

However, to date, that initiative has just not materialised.

Second, investors have to be forced into accepting the need for some degree of macroeconomic stability at a time when global market conditions are far from settled.

For many equity investors, worsening econ-omic parameters lead by factors such as continuingly high levels of poverty, have just not been a challenge worth considering.

This has been nothing less than a short sighted approach.

Indeed, a pattern of uneven development where a few benefit while the majority suffers, must eventually bring together periods of economic crisis which are more than likely to lead to recurring instability with consequences for all.

Political upheaval

Finally, the past year has been politically tumultuous for Pakistan in the aftermath of the tragic assassination of former prime minister Benazir Bhutto.

2008's economic and political instability was compounded by a proliferation of bomb blasts, suicide attacks and targeted assassinations believed to be linked back to Islamic hardline groups across Pakistan.

There is little end in sight to this pattern of events as the country prepares to enter 2009.

Such insecurity is bound to hit the performance of companies across the board including those listed on the stock market.

However, it is possible to minimise the risk emerging from such powerful trends.

There are a number of countries around the world which have moved towards ensuring economic instability in a period of conflict.

For Pakistan, the main challenge comes from putting together and implementing policies which ensure increasing investor activity, even if such activity initially involves just domestic investors who spearhead a long term future driven by rising foreign investor activity.

- The writer is a journalist based in Pakistan