Relaxed Trading Rules Trigger Karachi Stocks Selloff

In spite of cheaper valuations of Karachi stocks from shrinking price earnings multiples relative to other markets, foreign investors in Pakistan continue to be nervous. As soon as the trading range was revised to plus or minus 5%, many investors took advantage to sell their holdings Friday and pushed the KSE-100 down more than 4%. The decline continued this week as the KSE-100 index lost 265.84 to close at 11,695.82. Earlier in the morning, it opened at 11,961.66. This is a far cry from the peak of 15739.25 earlier this year.

"The measures taken on Friday proved to be an exit strategy for foreign investors," Asad Iqbal, managing director at Ismail Iqbal Securities Ltd. told Business Recorder newspaper in Karachi.

Securities and Exchange Commission Chairman Razi-ur-Rehman believes the market has a liquidity crisis and he blamed the bearish trend in the equity market on the State Bank of Pakistan's (SBP) tight monetary policy, which has affected market liquidity.

The State Bank raised interest rates to 12 percent from 10.5 percent in May which hurt the stock market. Traders are expecting another increase in the next scheduled meeting before July 31 to curb inflation and support the rupee.

The rupee ended firmer at 69.50/60 on Monday as sentiment improved slightly after the introduction of stabilization measures last week and on rumors the government may curb imports, traders said, according to Business Recorder. State Bank of Pakistan is reportedly taking steps to arrest the rapid decline in Pakistan's dollar reserves. According to the latest SBP weekly report, the foreign currency reserves fell to $11.123 billion, down from $15.6 billion at the end of last year.

The State Bank last week moved to stabilize the rupee after it set its weakest ever closing level at 72.85/90 on July 8.

Among the most active stocks Friday, volume leader NIB Bank fell 8.7 percent to 9.69 rupees, Oil and Gas Development Co Ltd shed 5 percent to 110.45 rupees, while Arif Habib Securities was 4 percent lower at 143.49 rupees.

The Karachi stocks had rallied earlier from measures that included a 1-month ban on short selling, a special 30 billion rupee ($446 million) fund set up to stabilize volatility, and revision of the short circuits to 10% on the upside and 1% on the downside, announced June 24, 2008. Please read my post "Karachi Stocks Rally after Ban on Short Selling" to learn more about recent changes at the KSE.