Interview: ‘KSE-100 likely to touch 7,000 points in next three months’

KARACHI: The Karachi stock market has shown a record-breaking performance, especially in December as the benchmark 100-share index raced past the elusive 6,000-point mark. And the consensus is that the rally will continue in 2005 as well on the back of continued privatisation of state-run entities and strong corporate earnings. Daily Times’ Mushfiq Ahmad talks to Idrees Adam, proprietor of H M Idrees H Adam, a local brokerage firm, and asks him about prospects for the market in 2005.

Daily Times: The KSE 100-share index has crossed the 6,000-point mark. Where the market is headed now in your opinion?

Idrees Adam: I think with the way the situation is going, the index might touch the 7,000-point mark within next three months because stable policies adopted by the government are quite favourable to the market. Besides, dividends are also expected from most companies. The awareness among people about the stock market is increasing. Privatisation is going on which will benefit the market.

DT: What factors will affect the market in the near-term?

IA: In 2005, banks will be authorized to give loans. At the moment they are not able to give overdraft facilities. Institutions will again start funding from January and investors will be getting loans from banks. Privatisation of Kot Addu Power Company will be affecting the market. The privatisation process is expected to gain momentum. The stability on the political front will be helpful to the market.

DT: Badla volumes and rates are very high. Should this be a cause for worry?

IA: It will affect only those people, who are investing beyond their limits and totally depending on badla financing. It is advisable to investors that they should keep within their limits. Correction due to high badla is occurring within intra-day trading. The weak holders offload their positions in mid-day trade. No major correction will be there, even if it comes, it will be healthy and not a crisis. Institutions are not affected by high badla.

DT: What are your favourite stocks these days?

IA: I cannot mention any particular stocks but the cement sector has good outlook due to demand in the Middle East. Construction of dams is also expected, so there would be good demand in the future. The oil and gas sector is also very good because exploration activities are going on at a good pace the law and order situation in exploration areas has improved. Banks are already high at the moment. This sector is good but not so attractive. There is less potential in it now. The textile sector has also good prospects but availability of their shares is low. They don’t have much floating shares.

DT: Seeing the current surge of the index, some people say they should have entered the market in September, when the index was at 4,800 points. Is it too late now?

IA: People can still enter the market because some stocks still have potential with dividends expected. All stocks have not risen abruptly but gradually. Investors could have made losses as well had they entered the market then. Adjustments have also been there because some shares have risen after falling. You might also have lost had you invested with badla.

DT: Interest rates are now increasing gradually. Will it hurt investment in the stock market?

IA: The State Bank is not increasing rates of interest rapidly. The market is aware that interest rates are going up. The market is observing and adjusting accordingly. Interest rates are not getting doubled. The SBP is increasing the rates slowly. It will not affect the market much, because the market will still be liquid since banks have funds. SBP is moving according to the market situation. It does not pick up all the money. State Bank is not indulging in panic borrowing. It will not tighten the market totally. Dollarisation has ended and SBP does not borrow dollars in panic. They don’t need to borrow much now. In fact, banks fear their bids will be rejected if they demand a higher yield, so they keep their demand low.

DT: Is the client base of share market investors increasing?

IA: Yes, it is increasing which is evident from the surge in turnover. Due to online trading, people from remote areas can invest through software prepared by KSE. The investor himself, not the member, completes transaction now. Members are also satisfied because investor first creates his exposure in the account. Due to new procedures adopted, the member and the client both are under the net of SECP. There is more confidence. Risk management has become easier for the KSE.

DT: Whose responsibility is it to expand the client base?

IA: It is combined responsibility of the KSE, the SECP and members. Members are now advertising to attract small clients. They are vigorously marketing. Members are spending money to attract investors. The role of the SECP and the KSE management is very satisfactory in increasing the client base as they are always alert to prevent something that could hurt investor confidence.

DT: Although the market has been bullish for quite sometime, foreign investment is still low. Why?

IA: You cannot say that foreign investment is not coming. Non-residents Pakistanis are investing. We can say that the stage is ready now and any moment it can start pouring in due to privatisation and improvement in our economy, evident from the fact that we are now out of the IMF programme. When we were in a defaulting situation, how could anybody have come and invested here. If policies are stable and risk management is there, law and order situation keeps improving, then foreign investment will definitely come.

DT: Badla is being phased out and replaced by margin financing. What effect will it have on the market?

IA: It will be a gradual process and it is good to switch over from badla to margin gradually. Risk management will become comfortable. COT was limited to 30 items. Margin financing will be in more stocks.

Risk will be divided among institutions and members. Only the KSE will not bear the risk. There was more risk management burden on the KSE in badla financing. Now it will be divided. Whatever effect it could have on the market, it has. Now there would be no panic.

DT: There are talks of demutualization and merger of the three stock exchanges. What do you say about that?

IA: If the matter of demutualization is smoothly finalized, it will be good for all. The committee is working on proposals and there is no development on it so far, so I cannot comment. But members and other concerned people are so mature, they would handle the matter of demutualization and merger of three stock exchanges amicably.

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