KSE-100 Index Sets New Record: What is the Market Telling Us?

Posted on February 27, 2008
Filed Under >Adil Najam, Economy & Development
35 Comments
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Adil Najam

On Tuesday the Karachi Stock Exchange’s (KSE’s) KSE-100 Index – Pakistan’s equivalent to the Dow Jones Index – broke the psychological barrier of 15,000 for the first time. At the time of writing this (on what is Wednesday morning in Pakistan) the Index remains well above that mark.

Karachi Stock Exchange Chart

The rise of the stock market(s) in Pakistan in recent years has been phenomenal. Much of this matches the rise of emerging markets all over the world, but the rise over the last year is particularly phenomenal given just how depressed, depressing, uncertain and unclear the politics of the country has been. My friends who work in the financial sector tell me that money can be made from bad news as much as from good news. I am sure they are right, though I am not sure if I understand all the nuances of how.

Karachi Stock ExchangeBut it still intrigues me why and how the market in an economy like Pakistan – where the stock market itself is rather small in terms of size as well as participation – works in relation to what is happening in the society at large. The charts, and news, clearly indicate that the stock exchange in Pakistan has not been oblivious to the political and socio-economic upheavals of the last many months. But the direction seems to have been clearly upwards and it is not clear just how much of those events are reflected in the market.

One is used in larger markets (USA, Europe, Japan) to seeing the happenings in society and politics to have deep and immediate impacts on the market fluctuations. Is it the same in Pakistan? Or is it that because so many fewer people are actually invested in stocks that the stock market’s rhythms are less intertwined with local happenings and more with global and international happenings (especially if much of the capital flow is from international investors)? And, if, indeed, the stock market in Pakistan is as much of a barometer and reflection of what is happening in the country, then what is it that the market has been telling us all year, and is telling us now?

I know that many of our readers have far greater expertise in this area. Maybe they can help me and others decipher the meaning of all of this better.

(Graphs from Bloomberg)

35 responses to “KSE-100 Index Sets New Record: What is the Market Telling Us?”

  1. Akif Nizam says:

    Adil, the answer is very simple. It’s none of the conspiracy theories that have been proferred by so many here. While it’s true that given the limited scope of the KSE (only 650 companies listed), it’s subject to short-term manipulation, the truth is that Pakistani stocks are very very cheap as compared to stocks in major world markets. The price of a stock is determined mainly by its Price to Earnings ratio and by it’s Return on Investment. For the major US indexes, the P/E ratio is about 16 right now and ROI historically has been 12% or so. In Pakistan, this ratio is below 5, very often under 3 for major players and ROI can exceed 50% in many situations for relatively safe stocks. In some cases, people are able to get their entire investment back in a year or two….and this is while investing in the safest of stocks. These returns that are inconceivable any where else. That’s why at any sign of stability, the market responds positively. I have relatives who consistently make big money and it’s completely misleading to say that only the super rich can take advantage of the market. If we can get some investor confidence about the stability of policies in Pakistan, this market can double in no time.

  2. Ahmad R. Shahid says:

    @jaded

    If religion has anything to do with development, then why is Philippines not developed? Why was Eastern Europe under-developed? Why Malaysia has made great strides in economic development? I am sorry but your logic is skewed.

  3. Ed says:

    Market? The KSE? HAH!

    Visit any stock market and you’ll notice they’re built on a principle of market freedom. Their markets work on supply, demand and a whole lot of speculation.

    I ask, who’s speculating at the KSE? Or all the big boys wheeling and dealing with the money of poor investors?

  4. jaded says:

    one thing which i do not understand about your country is what is lacking in you guys not to be with the best and brightest and i think that is religion you are too obsessed with religion to be doing any thing too constructive like building your economy or developing your nation come on guys you got your country and look you are still living in the times of mughals and your ” so called bright past ” which never was so wake up or you would be left behind the world is impartial it does not have time for failures

  5. Farid says:

    Some of the comments here seem irrelevant to the topic of the post and are hecklers and spammers that you should do something about. But the main point of the post is very important. The author is right that in small exchanges like the KSE you cannot expect the index to reflect national trends. This is because a very small number of people and small proportion of society are actually invested in stocks. The stocks only reflect the feelings of those who are invested. In countries where most people in the country are invested in stocks you will see stocks mirror national sentiment, if most people are not, then they will not. In most emerging economies, even those with large market capitalization, like China and India, the market will NOT reflect national sentiment because majority of households have no stocks. In these countries and also Pakistan it is usually the international sentiment that is reflected in the stocks because it is the international institutional investors that really have most stocks. Good topic by the way.

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