The last two weeks of May saw dramatic twists and turns in the stock market.
Despondency was in the air following a seven-week selling spree that saw the value of stocks plunge 14 per cent as the KSE-100 index touched a three-year low of 33,167 points.
Finance Minister Dr Abdul Hafeez Shaikh met stockbrokers and other stakeholders on May 17 and surprisingly agreed to a series of demands, including the approval for a market support fund.
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It finally dawned upon the government that the stock market meltdown of 20,000 points (38pc) that began in May 2017 and continues to date, placing the Pakistan Stock Exchange (PSX) among the worst-performing regional markets, was bad enough publicity.
The finance minister’s consent to a market support fund seems to have breathed life into the market, which saw the return of the bull. On May 20, the index made a minor gain of 84 points while the weekly gains extended to 2,537 points (7.6pc). It represented the highest weekly return in 10 years in percentage terms. Until last Thursday, the meteoric rise of the index in 11 out of 12 sessions saw it accumulate 10.54pc gains.
Contrary to the perception that setting up the support fund would take a while, things appear to have proceeded on a fast track so far
The market support fund, which has caused excitement among investors, will be created along the lines of the State Enterprise Fund (SEF) established in 2009. It was managed by National Investment Trust (NIT).
The SEF was set up to support the market after the crash of 2008. It invested in the shares of eight government-owned enterprises listed on the stock market: Oil and Gas Development Company (OGDC), Pakistan State Oil (PSO), Pakistan Petroleum (PPL), Sui Southern Gas Company (SSGC), Sui Northern Gas Pipelines Ltd (SNGPL), Pakistan Telecommunications Ltd (PTCL), National Bank of Pakistan (NBP) and Kot Addu Power Company (Kapco).
The move provided the sinking market with stability. NBP contributed Rs7 billion, Employees’ Old-Age Benefits Institution (EOBI) Rs5bn and State Life Insurance Rs2.5bn while a consortium of banks extended the remaining Rs5.5bn. The financing institutions lent money to NIT at Karachi Interbank Offered Rate (Kibor) plus 1pc.
Contrary to the expectation of some major market players that setting up the fund would take a while owing to a host of approvals required, things appear to have proceeded on a fast track.
Quoting the finance minister, a senior broker tweeted that everything was set for the launch of the fund: approvals from several boards and ministries were in place. The chairman of the Securities and Exchange Commission of Pakistan (SECP) indicated that the government-supported funds would be launched in the next 10 days i.e. soon after the Eid holidays.
A person privy to the ongoing process told Dawn that the two funds created on Jan 13, 2009, still exist. Only liquidity is required to make them operational. One of the funds (SEF) is a lender of loan while the other one (Equity Opportunity Fund) will convince institutions to inject liquidity as investment. He believed the move would raise enough money as the major drawback of the market was a lack of liquidity, not fundamentals.
The SEF will purchase stocks of eight state-owned enterprises (SOEs) as was done in 2009. The lenders got back their funds with ample profit last time around. This is why these institutions will likely be willing contributors to the fund this time as well.
According to an analyst at Arif Habib Ltd, “SEF made a total return of 39pc from the day of its launch to June 2009, 86pc to September 2009 and 80pc to December 2009. During the course of this period (Jan-Dec 2009), a similar spell of stability was cast on the KSE-100 index… the return of the KSE-100 index to June 2009 was 18pc… and by December 2009, the (then) Karachi Stock Exchange recovered 55pc.”
Although no amount has been specified, a source said the size of the fund would be equal to that of the 2009 fund (Rs20bn).
Some market participants were worried about the delay in the launch of the support funds as lenders, mainly NBP, insisted on receiving sovereign guarantee. But a source said that at least 45 days were required to furnish sovereign guarantee after its approval from the Economic Coordination Committee (ECC) and the Cabinet. “For an earlier launch of the Fund, the government will provide a letter of comfort to the lenders, which will later be exchanged with sovereign guarantee,” he asserted.
State-owned listed companies have received a severe hammering in the stock market downturn. In the last one year, the price of SSGC has fallen by 52pc while that of SNGPL dropped by 32pc. The price of OGDC went down by 8.4pc during the year. In the last 10 days, foreign investors and local individuals and financial institutions engaged in anticipatory buying to reap profits after the launch of the market support fund.
Published in Dawn, The Business and Finance Weekly, June 3rd, 2019