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Exploring Stock Market Crashes                       1




                                  EXPLORING

                         STOCK MARKET
                                   CRASHES

                         Stock Markets of Pakistan




                                      By




                                 Fahim Akhtar




15 May 2012

fahimakhtar07@hotmail.com

fahimakhtar@aia.org.pk
Exploring Stock Market Crashes                            2




                                   CONTENTS


 S / No                  Subject / Topic / Issue   Page
1         Introduction
2         Market Mechanism
3         Participation Pattern of Market
4         Historical Growth of Market
5         Portfolios building and Results
6         Aggressive Portfolios
7         Defensive Stocks and Impact
8         All time Favorite Stocks
9         In search of Crashes
10        Interviews and Meeting
11        Survey and Analysis
12        Views of Investors with hefty losses
13        Conclusion
14        Recommendations
Exploring Stock Market Crashes          3




                For full book contact

      fahimakhtar07@hotmail.com
Exploring Stock Market Crashes                      4


                   EXPLORING STOCK MARKET CRASHES

Introduction
Exploring Stock Market Crashes                                                 5




                                     MARKET MECHANISM

How Stock Market Functions

What stock market is?

This     is     the      market           in

which shares             of          listed

companies       are      issued       and

traded          either             through

exchanges or over-the-counter

markets.       Also known as the

equity        market,         it     is        one   of   the   most   vital   areas

of a market economy as it provides companies with access to capital and

investors with a slice of ownership in the company and the potential of gains

based on the company's future performance.
Exploring Stock Market Crashes          6




                For full book contact

      fahimakhtar07@hotmail.com
Exploring Stock Market Crashes            7



                  For full book contact

         fahimakhtar07@hotmail.com
Exploring Stock Market Crashes          8




                For full book contact

      fahimakhtar07@hotmail.com
Exploring Stock Market Crashes   9
Exploring Stock Market Crashes          10




                For full book contact

fahimakhtar07@hotmail.com
Exploring Stock Market Crashes                                                 11




SECP.       The     Securities

and                 Exchange

Commission of Pakistan

(SECP) is the financial

regulatory        agency    in

Pakistan               whose

objective is to develop a

modern       and      efficient

corporate sector in and a capital market based on sound regulatory principles,

in order to foster economic growth and prosperity.

KSE.       Karachi      stock

exchange is responsible

for      offering      quality

services to investors in

buying and selling of

securities including their

transaction. Exchange is

also      the       immediate

regulator        responsible to take care of investors protection program and

growth      of    investment      environment   within   the   country and   abroad.
Exploring Stock Market Crashes                                           12




Participation Pattern in Stock Market. In order to participate as investor in

stock market, one is required to open an account with CDC and sub account

with one of the member of stock exchange for active trade and

implementation of orders for buying and selling of stocks. There are 200

members registered with Karachi stock exchange and half of them are active

traders and functioning to serve the investors. Some of the top brokers are:-

   1.      Kasb securities

   2.      akd securities

   3.      BMA trade

   4.      IGI trade

   5.      SCS trade

   6.      Taurus Securities

   7.      MM Securities

   8.      Top line Securities

   9.      Foundation securities

   10.     Arif Habib securities

   11.     Sunrise capital

   12.     Burj capital

   13.     Invest cap

   14.     Elixir securities .
Exploring Stock Market Crashes                                             13


Major Participants of Market

   1.      Local investors. At least 2,000,000 account holders are registered

           in CDC for stock trading in different stock exchanges of Pakistan.

           Unfortunately, active traders are not more than 50,000 right now.

           This includes investors operating accounts from Rs 100,000 and in

           some cases Rs 5000 also. Ironically, most of these accounts are

           dormant and non functional and number of operational accounts

           reduced to 20,000 in December 2011 with lowest participation in

           last ten years. The participation has again grown significantly and

           there are above 80,000 account holders working in stock market on

           regular basis.

   2.      Foreign investors. This category includes investors from abroad

           and they are the one looking for opportunities all over the world and

           choose a specific market considering several important factors

           such as economic growth of the country, investment protection and

           prospects of capital gain in better time frame. They build portfolio

           buy active buying in selected stocks and leave market by selling

           their position in profit or under some panic conditions in which their

           investment in threatened.

   3.      Mutual funds. Mutual fund industry offers an opportunity to those

           individuals who have no time and desire to go into the intricate

           system of market mechanism. Different products of mutual funds

           are designed and launched to benefit       those investors who are
Exploring Stock Market Crashes                                            14


           interested to get the professional fund mangers hired by mutual

           funds industry. Fund managers build their portfolio positions basing

           on opportunity and sell them off on significant gains or in case of

           any threat to investment like foreigners.

   4.      Institutions. National investment trust ( NIT) is one of the

           organization strategically engaged in investing in stock market. For

           this purpose, professionals of NIT work out complete plan to build a

           portfolio and invest subsequently in market. There are different

           intuitions engaged in looking for opportunity in stock market and

           take positions in appropriate time by selecting suitable stocks which

           are trading in lower multiples.

   5.      Banks. Banks are also engaged in investment in stock market and

           build portfolio for capital gains. Banks also buy back shares

           increase their holding in their own stocks. Banks also give loans to

           stock and brokerage companies for the purpose of extending badla

           or margin trade to investors and institutions. Banks selling when

           margins are called during crashes is also important and exert

           pressure in market.
Exploring Stock Market Crashes                                       15


Composition of KSE - 30 Index

1.     MCB Bank Limited

2.     Oil & Gas Development Company Limited

3.     National Bank of Pakistan

4.     Pakistan Petroleum Limited

5.     Pakistan Oilfields Limited

6.     Fauji Fertilizer Company Limited

7.     Pakistan Telecommunication Co Limited

8.     Pakistan Industrial Credit & Investment Corporation Limited

9.     Pakistan State Oil Company Limited

10.    The Hub Power Company Limited

11.    Engro Chemical Pakistan Limited

12.    The Bank of Punjab Askari Commercial Bank Limited

13.    D G Khan Cement Limited

14.    Fauji Fertiliser Bin Qasim Limited

15.    Bank Al-Habib Limited

16.    Faysal Bank Limited

17.    Adamjee Insurance Company Limited

18.    Sui Northern Gas Pipelines Limited

19.    Sui Southern Gas Company Limited

20.    Nishat Mills Limited

21.    Bank Al Falah Limited

22.    Arif Habib Securities Limited
Exploring Stock Market Crashes          16


23.    Kot Addu Power Company Limited

24.    United Bank Limited

25.    Lucky Cement Limited

26.    Shell Pakistan Limited

27.    Picic Commercial Bank Limited

28.    Attock Petroleum Limited

29.    Fauji Cement Company Limited

30.    Banl Alhabib
Exploring Stock Market Crashes                                      17


Top Gainers in stock exchange



Stock                  Price in    Price in Rupees (    Gain in   Gain %

                     Rupees ( 1     12 May 2012)        Rupees

                       January

                        2012)

Engro Foods             22.25           50.58            28.33     127

Fauji Fertilizer         147        180( including        33      22.44

                                      bonus and

                                      dividends)

Jahangeer                4.04           22.39            18.35    454.20

Siddiqi Company

Limited

Lucy Cement             75.04            109             33.96    45.25

Muslim                   134        190 ( including       56      41.79

Commercial                        bonus and dividend)

Bank

OGDC                     151             166              15       9.93

Pakistan                 168        187( including       28.9     17.22

Petroleum                              dividend)

Summit bank              1.64             4.1            2.48      150

United bank             52.56     82( including cash     29.44      56

                                       dividend)
Exploring Stock Market Crashes   18




Participants in Stock Market.
Exploring Stock Market Crashes                                         19




Historical Growth of Stock Market.         Graph given below indicates the

historical performance of market. Only a period commencing from 1092 has

been indicated here because this is the time when stock market started

performing in real sense and was exposed to risk also. Market moved from

1500 points and touched the level of 16000 during 2008 and than witnessed

the most critical crisis of history in which index was trading between 4000-

5000. Market is again performing and currently lies at 14600 levels.




                                                       Crash 2008


                                          Crash 2005




                            Crash 2000
Exploring Stock Market Crashes                                           20




                            IN SEARCH OF CRASHES

Unfortunately our market remains exposed to crashes and the process is

repeated with an interval of 3-5 years. A stock market crash is a sudden

dramatic decline of stock prices across a significant cross-section of a stock

market, resulting in a significant loss of paper wealth. Crashes are driven by

panic as much as by underlying economic factors. They often follow

speculative stock market bubbles. Stock market crashes are social

phenomena where external economic events combine with crowd behavior

and psychology in a positive feedback loop where selling by some market

participants drives more market participants to sell. Generally speaking,

crashes usually occur under the following conditions: a prolonged period of

rising stock prices and excessive economic optimism, a market where P/E

ratios exceed long-term averages, and extensive use of margin debt and

leverage by market participants. There is no numerically specific definition of

a stock market crash but the term commonly applies to steep double-digit

percentage losses in a stock market index over a period of several days.

Crashes are often distinguished from bear markets by panic selling and

abrupt, dramatic price declines. Bear markets are periods of declining stock

market prices that are measured in months or years. While crashes are often

associated with bear markets, they do not necessarily go hand in hand.

Seeing in the context of international markets, the crash of 1987, for example,

did not lead to a bear market. Likewise, the Japanese Nikkei bear market of
Exploring Stock Market Crashes                                      21


the 1990s occurred over several years without any notable crashes. In this

project we have taken and analyzed data from year 2000 to date and during

this period we have witnessed three crashes which are:-

Major Crashes

   1.      2000

   2.      2005

   3.      2008




                    Hostile investors protesting after the
                    crash of 2008
Exploring Stock Market Crashes   22
Exploring Stock Market Crashes              23




                    For full book contact

               fahimakhtar07@hotmail.com
Exploring Stock Market Crashes                             24


               Flow chart –2005 Crash




                 Market felt sharply with sell off

                                            Market
 Insider trading                            manipulation


                          Inquiry ordered




                    No major step taken
                    against culprits
Exploring Stock Market Crashes                                           25


Year 2008 Crash. Market was trading at all time historically high index level

when this crash came. With the demise of late Benazir Bhutto and damage

done during protest to infrastructure and resources market came under

pressure and foreign investor participation was withdrawn. International

recession news and depreciating crude oil prices also damaged stock market.

Panic sell off was there and regulator of stock exchanged freeze the stock

market for four months to control collapse of stock market. Freezing of market

made really bad effects and post freeze panic caused steep fall in which

market depreciated more than 68 %.Every one who had anything to do with

the Pakistan capital market—the regulators, brokers and traders now fall over

each other in condemning the ‘floor’ or freeze as an unforgivable blunder. It

turned the catastrophe into calamity. The ‘floor’ remained in place for as many

as 108 days. When it was finally lifted on December 14, the market, as was

feared, came crashing down to the level of 4782 points in fewer than fifteen

sessions. No one had ever figured out the loss caused to investors, but an

idea can be had from the evaporation of paper value of corporate Pakistan.

As much Rs1.4 trillion were swept off the market capitalization, which dipped

from Rs2.881 trillion on August 8 to Rs1.578 trillion on January 24, 2009,

when the market started to show first sign of recovery. The KSE offered

payment of only 6.7 per cent compensation of the claims of investors, who

lost their investments due to default of five brokers in the August-2008 market

crash on the condition that they surrender their right to challenge the partial

settlement in any court of law. Thousands of small investors lost billions of
Exploring Stock Market Crashes                                               26


rupees during the 2008 market floor, leading to cancellation of membership of

five defaulter brokers, including Eastern Capital, Prudential Securities, Capital

One Equities, MKA Securities and Click Trade.



KSE     100    index KSE         100    index     Change            % age

before Crash            after Crash

       16000                     5000              11000             68.75
Exploring Stock Market Crashes                                        27




Flow diagram – Market Crash in 2008




                               Poor law and order &
                           political instability –KSE 100
                                     index 15600




  Global sell off                  Recession effects         Foreigners
                                  KSE 100 index 9600         selling

     Market                                              Panic created by
     manipulation                                        freeze
     by top
     brokers




     Regulators
     responsible
     for not
     ensuring                    Nose down to 4782 KSE
     risk                                level
     mechanism
                                                         MTS was
                                                         removed


                                 Market moved to 8600
                                 when freeze was
Exploring Stock Market Crashes   28
Exploring Stock Market Crashes                                           29


Major Looser in 2008 Crashes

Stock                      Price in   Price in Rupees   Loss in Rupees

                           Rupees       after crash

                            (2007)

JSCL                         1210           30              1180

Fauji Fertilizer             132            59               63

DGKC                         110            22               88

Lucy Cement                  120            29               91

Muslim                       260            91               169

Commercial Bank

OGDC                         134            42               72

Pakistan Petroleum           242           105               137

Summit bank                      24         3.1              21.9

United bank                  180            34               146
Exploring Stock Market Crashes              30




                    For full book contact

               fahimakhtar07@hotmail.com
Exploring Stock Market Crashes                                                                   31




Major market players

Arif Habib Grroup.                One of the largest

business groups of country. He has very

important role in functioning and participation

of market. The Arif Habib Group (AHG) ranks

amongst       the    fastest     growing       multi-sector

groups in Pakistan.             This has been made

possible by a proven record of a strong ability

in identifying and developing successful business ventures and generating

phenomenal returns despite subdued economic development. -------------------

-------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
Exploring Stock Market Crashes                                                                  32


Mian Mansha

Mian Muhammad Mansha                     is owner of

Nishat group and an important figure of

stock market. He holds control of Muslim

Commercial         bank,     Adamjee        Insurance,

Dera Ghazi Khan Cement and Nishat Mills

shares. His textile mill in Faisalabad under

the name of Nishat Mills still is one of the

biggest textile units in Faisalabad. . Apart

from these large acquisitions, he was simultaneously expanding his Nishat

Textiles segment, Nishat Textiles is Pakistan's largest fabric mill.-----------------

-------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------
Exploring Stock Market Crashes                                                                  33


Aqeel Karim Dhedee. Aqeel Karim Dhedhi,

Chairman AKD Group, is widely acknowledged

as    one     of    Pakistan’s       leading      economic

authorities.        His      innovative         investment

strategies have led him to become an iconic

figure in Pakistan’s capital market. ----------------

--------------------------------------------------------------

--------------------------------------------------------------

-------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------.
Exploring Stock Market Crashes                                           34




Interviews / Meetings. A number of well positioned officials, intellectuals and

leading investors were interacted for research purpose for the completion of

project. Views extended and opinion given by these people enabled the

teams to form some conclusions with regard to sustainability and crash issues

of market. Only a few amongst them have been picked for this paper and

succeeding paragraphs will cover details of the opinion by these individuals.
Exploring Stock Market Crashes                   35


FLOW CHART – MARKET CRASH


              Foreign investment withdrawn



                                 Funds selling



                          Index in pressure



            Margin calls for debt products




                                  crash
Exploring Stock Market Crashes   36
Exploring Stock Market Crashes   37
Exploring Stock Market Crashes   38
Exploring Stock Market Crashes   39


   1.
Exploring Stock Market Crashes                                               40


     2.        When greed overcomes the market; no one talks about fear. Greed

               completely eclipses out fear and the fact that people usually have a

               short term memory also does quite a bit of good. In times of bull

               market rallies,

               people        forget

               what     it    was

               like     a      few

               months or few

               years ago and

               what it meant

               to be fearful.




Survey and conclusions drawn

1.        Social Web Survey. A survey was launched on social website face

book to ascertain the reason of causes of stock market crashes. Participants

in survey were mostly active investors of stock market who gave their views

with regard to market falling in crisis. Contents are mentioned in appendix 2.

Options offered were:-

          a.      Selling by foreigners

          b.      Speculative buying

          c.      Poor risk mechanism

          d.      Risk or badla
Exploring Stock Market Crashes                                 41


       e.      Insider trading

       f.      Law and order and political instability.

       g.      Effects of recession in international market.

       h.      Bad macro indicator

       i.      Prompt revision of rules and policies.
Exploring Stock Market Crashes                                                42


2.     Feed back from stock brokerage houses. All top stock brokers

were contacted through e mails to get feed back from them purely basing on

facts held in the form of data. Some of these houses have replied positively

and conclusion drawn is:-

       a.      Almost all investor suffering heavy losses were utilizing badla or

               leverage product. With the deposit of some amount 3- 4 times

               buying were held in portfolio of these investors. When market

               started falling sharply, their positions were sold to settle the

               margin falling in the account and this created more pressure.

       b.      Instead of understanding the gravity of crisis, many investor

               were optimistic and were expecting market rebound and

               utilized leverage product to make more profit and later their

               holdings were forcefully sold by the brokerage houses.

       c.      stock brokerage houses were having pressure from banks and

               investment companies side to maintain the margin and in order

               to ensure that margins were settled continuously.
Exploring Stock Market Crashes                                               43




3.     Views of Investors Suffered in Crash. A record of those investors

who suffered heavy losses in stock market crashes was picked up from stock

brokerage houses and CDC. Some of these investors when approached

replied and assisted during the survey. Their feed back reflects:-

       a.      Investors were mostly not apprehensive of market crash in the

               beginning and did not sell their holding in right time. Most of the

               stock on leverage were pledge by the brokerage house to

               maintain the margin.

       b.      Decision to freeze market did not allowed investors to take

               decisions themselves rather market freeze created panic and

               when freeze was lifted they preferred to sell booking heavy

               losses.

       c.      During crashes efficiency and services of stock brokerage

               house depleted to the extent that there was no one to guide

               investors with regard to their investment methodology.

       d.      Most of the investors suffering heavy losses were not aware

               with the market mechanism and merely attempted to invest in

               market with the intent to multiply their wealth quickly.

       e.      Investors were not aware with their rights and their expected

               response when their brokers were defaulted. It was an uphill

               task to put forward claims for compensation.
Exploring Stock Market Crashes   44
Exploring Stock Market Crashes                                              45


Conclusions - Key Causes of Market Crisis

1.     High leveraging has become a phenomenon in most global markets

since mid-2000 and our market is no exception to this. Leveraged products

with different titles are prepared and offered to investors to buy stocks 3- 4

times more than the cash they have in possession. In our market this product

is known as MTS (margin trading system).An investors with a cash of Rs

100,000.00( one hundred thousand) is allowed to buy stocks of worth Rs

300,000.00( three hundred thousands) and even more in case of in hose

badla offered by stock brokerage houses. When share prices fall investors

are required to deposit the amount to maintain margins and failing in these

they are required to sell their held stocks. High leveraging is one of the factors

that contribute to stock market crash.

2. Sell-off was seen in our market by foreign funds in tandem with global

market sell-off in the summer of 2000 and 2008.During 2000 and 2008 market

passed through fear of recessions and were badly hit in which pries of

commodities also came down. Crude oil came down significantly to half of its

all time high. Our stock market also was subject to his effects and a

continuous exit from foreign investors was seen. Sell off caused consistent

pressure in index and took market down.

3. The composition of our indices is inappropriate and some stock particularly

of oil and gas sector and mainly OGDC is index heavy stock. Any buying or

selling in oil and gas sector and OGDC directly effects the index and turn

sentiments accordingly. During all major crashes selling in OGDC which is
Exploring Stock Market Crashes                                             46


often a top pick of foreign investors caused index to came down sharply and

this falling down also contributed to crash. Composition of index

inappropriately with very few heavy weight stocks offers players to cause

panic like situation in market. This specially occurs when index looses much

by selling in one odd stocks only first in a particular session cause bearish

sentiments in investors.

4. Manipulation by a group, brokerage house or individual investors with hefty

portfolio. This includes generation of very high activity of buying along with

spread of rumours with brighter news on basic fundamental changes in dull

stock stocks actually with no reality of any positive change. Later, when news

were confirmed fake causing panic amongst investors with selling, the bears

rules in totality. Our stock market is full with the history of stocks

outperforming initially and falling nose down causing losses to small investor

sin particular.

5. Insider trading has been a feature of our market. Insider trading is basically

trading in a stock with privileged information. This kind of trade shifts entire

market momentum in different order and hurts market and confidence of

investors.

6. Some major investors also enter in market carrying black money or

sometime with the objective of multiplying departmental financial situation

healthy in quicker way. The investment in amateur pattern with no or hasty

time frame also affected market in past.
Exploring Stock Market Crashes                                           47


7. Foreign investment portfolio assumes significant importance. This portfolio

is built by off shore accounts holders some time by foreigners and many time

some domestic players operating portfolio accounts of abroad while sitting in

Pakistan. A real foreigner investor invest with a lot of work considering

valuation in our markets in comparison with other market taking into account

internal political situation of country too. In our few crashes one of the

reasons was uncertain of change on political canvas also.

8. Poor market mechanism is also one of the causes which also become

reasons of crash. This ranges from application of all measures likely to affect

market adversely ranging from financing to placing of circuit barkers at

appropriate levels. Revision of gain limits in case of a particular stock in

appropriate manner may bring imbalance sentiments in market environments

and later proves harmful results.

9 . Lack of apprehension, awareness and education in case of a small

investors. Small investors mostly rely on broker’s advice while forming their

investment portfolios. Many time small investors do not follow any investment

plan at all. Irrational decisions coupled with lack of know how caused heavy

looses to investors particularly when the investment plans and portfolios were

changed frequently in abrupt manners.

10.    Fear and greed are two elements playing significant role for stock

traders. Fear cause in panic selling and market greed force an investor to buy

in leverage or badla and when market felt these positions are sold in loss

causing more pressure in index.
Exploring Stock Market Crashes   48
Exploring Stock Market Crashes   49
Exploring Stock Market Crashes                                         50


Recommendations

1.     Leverage products time to time

known as badla and MTS is required to be

made more stable with incorporation of risk

issues handling in extending of leverage

buying specially to normal investors and

banks. More liquidity to banks with debt availability may avert force selling

and offer some stability to market in crash of crash.

2.    Our education format of business

management studies contain in adequate

stuff for very important equity market

mechanism           including    fundamentals,

technical     and      companies    ordnance.

Revision of syllabus and incorporation of

these topics will gradually assist in grooming investors base in future.

Certifications and diplomas for stock market do not exist in Pakistan in

required numbers and financial literacy is required to be enhanced to handle

this issue.

3. Re composition of index is required with

weight of stocks shifted in appropriate

pattern. Rise and fall of a specific stock

should not affect the indices extraordinarily

and existing weight of oil based stocks may
Exploring Stock Market Crashes                                            51


be shifted in balanced order.

4. Insider trade, market manipulation and other malpractices must be dealt

with iron hands with more emphasis be given to investor’s protection and

compensation issues when ever this kind of practice is seen. In this aspect all

market regulators have to play an important role and devise policy that should

eliminate the possibilities of insider trade.

5. Enhancing broker’s quality and capability must be done with imposition of

strong penalties on violation of regulatory violations which should never be

accepted. Broker and his representative establish the most intimate

relationship with inventors in stock market and quality of services offered by

brokers must improve. This entails persistent guidance of investors in all

decisions and provision of quality research for the assistance of investors.

6. Some arrangements for guidance of new investors are essentially needed.

Fresh investors coming to market must be cautioned to educate themselves

before investing in market in which risk is always associated.

7. Regulators, brokers and other bodies must endeavour to make investors

wiser with the tricky affair of trading on margins and they should be

discouraged initially for some time to trade in leverage unless they get

experience.
Exploring Stock Market Crashes   52
Exploring Stock Market Crashes   53
Exploring Stock Market Crashes                                         54


Bibliography

   1.      www.kse.com.pk

   2.      www.pkfinance.info

   3.      www.scstrade.com

   4.      www.aia.org.pk

   5.      www.ismarpak.com

   6.      www.khistocks.com

   7.      www.investorsguide360.com

   8.      www.pakinvestorguide.com

   9.      www.tezimandee.com

   10.     www.thefinancialdaily.com

   11.     http://www.dailytimes.com.pk/default.asp?page=2007%5C05%5C0

           4%5Cstory_4-5-2007_pg7_5

   12.     http://www.activetrader-

           links.com/directory/online_stock_brokerage_firms_of_pakistan.html

   13.     www.brecorder.com

   14.     www.akdtrade.com

   15.     www.bmatrade.com

   16.     www.kasb.com

   17.     www.cdc.com

   18.     www.economist.com

   19.     www.bseindia.com

   20.     www.bloomberg.com

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Stock Market Crashes

  • 1. Exploring Stock Market Crashes 1 EXPLORING STOCK MARKET CRASHES Stock Markets of Pakistan By Fahim Akhtar 15 May 2012 fahimakhtar07@hotmail.com fahimakhtar@aia.org.pk
  • 2. Exploring Stock Market Crashes 2 CONTENTS S / No Subject / Topic / Issue Page 1 Introduction 2 Market Mechanism 3 Participation Pattern of Market 4 Historical Growth of Market 5 Portfolios building and Results 6 Aggressive Portfolios 7 Defensive Stocks and Impact 8 All time Favorite Stocks 9 In search of Crashes 10 Interviews and Meeting 11 Survey and Analysis 12 Views of Investors with hefty losses 13 Conclusion 14 Recommendations
  • 3. Exploring Stock Market Crashes 3 For full book contact fahimakhtar07@hotmail.com
  • 4. Exploring Stock Market Crashes 4 EXPLORING STOCK MARKET CRASHES Introduction
  • 5. Exploring Stock Market Crashes 5 MARKET MECHANISM How Stock Market Functions What stock market is? This is the market in which shares of listed companies are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance.
  • 6. Exploring Stock Market Crashes 6 For full book contact fahimakhtar07@hotmail.com
  • 7. Exploring Stock Market Crashes 7 For full book contact fahimakhtar07@hotmail.com
  • 8. Exploring Stock Market Crashes 8 For full book contact fahimakhtar07@hotmail.com
  • 10. Exploring Stock Market Crashes 10 For full book contact fahimakhtar07@hotmail.com
  • 11. Exploring Stock Market Crashes 11 SECP. The Securities and Exchange Commission of Pakistan (SECP) is the financial regulatory agency in Pakistan whose objective is to develop a modern and efficient corporate sector in and a capital market based on sound regulatory principles, in order to foster economic growth and prosperity. KSE. Karachi stock exchange is responsible for offering quality services to investors in buying and selling of securities including their transaction. Exchange is also the immediate regulator responsible to take care of investors protection program and growth of investment environment within the country and abroad.
  • 12. Exploring Stock Market Crashes 12 Participation Pattern in Stock Market. In order to participate as investor in stock market, one is required to open an account with CDC and sub account with one of the member of stock exchange for active trade and implementation of orders for buying and selling of stocks. There are 200 members registered with Karachi stock exchange and half of them are active traders and functioning to serve the investors. Some of the top brokers are:- 1. Kasb securities 2. akd securities 3. BMA trade 4. IGI trade 5. SCS trade 6. Taurus Securities 7. MM Securities 8. Top line Securities 9. Foundation securities 10. Arif Habib securities 11. Sunrise capital 12. Burj capital 13. Invest cap 14. Elixir securities .
  • 13. Exploring Stock Market Crashes 13 Major Participants of Market 1. Local investors. At least 2,000,000 account holders are registered in CDC for stock trading in different stock exchanges of Pakistan. Unfortunately, active traders are not more than 50,000 right now. This includes investors operating accounts from Rs 100,000 and in some cases Rs 5000 also. Ironically, most of these accounts are dormant and non functional and number of operational accounts reduced to 20,000 in December 2011 with lowest participation in last ten years. The participation has again grown significantly and there are above 80,000 account holders working in stock market on regular basis. 2. Foreign investors. This category includes investors from abroad and they are the one looking for opportunities all over the world and choose a specific market considering several important factors such as economic growth of the country, investment protection and prospects of capital gain in better time frame. They build portfolio buy active buying in selected stocks and leave market by selling their position in profit or under some panic conditions in which their investment in threatened. 3. Mutual funds. Mutual fund industry offers an opportunity to those individuals who have no time and desire to go into the intricate system of market mechanism. Different products of mutual funds are designed and launched to benefit those investors who are
  • 14. Exploring Stock Market Crashes 14 interested to get the professional fund mangers hired by mutual funds industry. Fund managers build their portfolio positions basing on opportunity and sell them off on significant gains or in case of any threat to investment like foreigners. 4. Institutions. National investment trust ( NIT) is one of the organization strategically engaged in investing in stock market. For this purpose, professionals of NIT work out complete plan to build a portfolio and invest subsequently in market. There are different intuitions engaged in looking for opportunity in stock market and take positions in appropriate time by selecting suitable stocks which are trading in lower multiples. 5. Banks. Banks are also engaged in investment in stock market and build portfolio for capital gains. Banks also buy back shares increase their holding in their own stocks. Banks also give loans to stock and brokerage companies for the purpose of extending badla or margin trade to investors and institutions. Banks selling when margins are called during crashes is also important and exert pressure in market.
  • 15. Exploring Stock Market Crashes 15 Composition of KSE - 30 Index 1. MCB Bank Limited 2. Oil & Gas Development Company Limited 3. National Bank of Pakistan 4. Pakistan Petroleum Limited 5. Pakistan Oilfields Limited 6. Fauji Fertilizer Company Limited 7. Pakistan Telecommunication Co Limited 8. Pakistan Industrial Credit & Investment Corporation Limited 9. Pakistan State Oil Company Limited 10. The Hub Power Company Limited 11. Engro Chemical Pakistan Limited 12. The Bank of Punjab Askari Commercial Bank Limited 13. D G Khan Cement Limited 14. Fauji Fertiliser Bin Qasim Limited 15. Bank Al-Habib Limited 16. Faysal Bank Limited 17. Adamjee Insurance Company Limited 18. Sui Northern Gas Pipelines Limited 19. Sui Southern Gas Company Limited 20. Nishat Mills Limited 21. Bank Al Falah Limited 22. Arif Habib Securities Limited
  • 16. Exploring Stock Market Crashes 16 23. Kot Addu Power Company Limited 24. United Bank Limited 25. Lucky Cement Limited 26. Shell Pakistan Limited 27. Picic Commercial Bank Limited 28. Attock Petroleum Limited 29. Fauji Cement Company Limited 30. Banl Alhabib
  • 17. Exploring Stock Market Crashes 17 Top Gainers in stock exchange Stock Price in Price in Rupees ( Gain in Gain % Rupees ( 1 12 May 2012) Rupees January 2012) Engro Foods 22.25 50.58 28.33 127 Fauji Fertilizer 147 180( including 33 22.44 bonus and dividends) Jahangeer 4.04 22.39 18.35 454.20 Siddiqi Company Limited Lucy Cement 75.04 109 33.96 45.25 Muslim 134 190 ( including 56 41.79 Commercial bonus and dividend) Bank OGDC 151 166 15 9.93 Pakistan 168 187( including 28.9 17.22 Petroleum dividend) Summit bank 1.64 4.1 2.48 150 United bank 52.56 82( including cash 29.44 56 dividend)
  • 18. Exploring Stock Market Crashes 18 Participants in Stock Market.
  • 19. Exploring Stock Market Crashes 19 Historical Growth of Stock Market. Graph given below indicates the historical performance of market. Only a period commencing from 1092 has been indicated here because this is the time when stock market started performing in real sense and was exposed to risk also. Market moved from 1500 points and touched the level of 16000 during 2008 and than witnessed the most critical crisis of history in which index was trading between 4000- 5000. Market is again performing and currently lies at 14600 levels. Crash 2008 Crash 2005 Crash 2000
  • 20. Exploring Stock Market Crashes 20 IN SEARCH OF CRASHES Unfortunately our market remains exposed to crashes and the process is repeated with an interval of 3-5 years. A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles. Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism, a market where P/E ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants. There is no numerically specific definition of a stock market crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. Seeing in the context of international markets, the crash of 1987, for example, did not lead to a bear market. Likewise, the Japanese Nikkei bear market of
  • 21. Exploring Stock Market Crashes 21 the 1990s occurred over several years without any notable crashes. In this project we have taken and analyzed data from year 2000 to date and during this period we have witnessed three crashes which are:- Major Crashes 1. 2000 2. 2005 3. 2008 Hostile investors protesting after the crash of 2008
  • 23. Exploring Stock Market Crashes 23 For full book contact fahimakhtar07@hotmail.com
  • 24. Exploring Stock Market Crashes 24 Flow chart –2005 Crash Market felt sharply with sell off Market Insider trading manipulation Inquiry ordered No major step taken against culprits
  • 25. Exploring Stock Market Crashes 25 Year 2008 Crash. Market was trading at all time historically high index level when this crash came. With the demise of late Benazir Bhutto and damage done during protest to infrastructure and resources market came under pressure and foreign investor participation was withdrawn. International recession news and depreciating crude oil prices also damaged stock market. Panic sell off was there and regulator of stock exchanged freeze the stock market for four months to control collapse of stock market. Freezing of market made really bad effects and post freeze panic caused steep fall in which market depreciated more than 68 %.Every one who had anything to do with the Pakistan capital market—the regulators, brokers and traders now fall over each other in condemning the ‘floor’ or freeze as an unforgivable blunder. It turned the catastrophe into calamity. The ‘floor’ remained in place for as many as 108 days. When it was finally lifted on December 14, the market, as was feared, came crashing down to the level of 4782 points in fewer than fifteen sessions. No one had ever figured out the loss caused to investors, but an idea can be had from the evaporation of paper value of corporate Pakistan. As much Rs1.4 trillion were swept off the market capitalization, which dipped from Rs2.881 trillion on August 8 to Rs1.578 trillion on January 24, 2009, when the market started to show first sign of recovery. The KSE offered payment of only 6.7 per cent compensation of the claims of investors, who lost their investments due to default of five brokers in the August-2008 market crash on the condition that they surrender their right to challenge the partial settlement in any court of law. Thousands of small investors lost billions of
  • 26. Exploring Stock Market Crashes 26 rupees during the 2008 market floor, leading to cancellation of membership of five defaulter brokers, including Eastern Capital, Prudential Securities, Capital One Equities, MKA Securities and Click Trade. KSE 100 index KSE 100 index Change % age before Crash after Crash 16000 5000 11000 68.75
  • 27. Exploring Stock Market Crashes 27 Flow diagram – Market Crash in 2008 Poor law and order & political instability –KSE 100 index 15600 Global sell off Recession effects Foreigners KSE 100 index 9600 selling Market Panic created by manipulation freeze by top brokers Regulators responsible for not ensuring Nose down to 4782 KSE risk level mechanism MTS was removed Market moved to 8600 when freeze was
  • 29. Exploring Stock Market Crashes 29 Major Looser in 2008 Crashes Stock Price in Price in Rupees Loss in Rupees Rupees after crash (2007) JSCL 1210 30 1180 Fauji Fertilizer 132 59 63 DGKC 110 22 88 Lucy Cement 120 29 91 Muslim 260 91 169 Commercial Bank OGDC 134 42 72 Pakistan Petroleum 242 105 137 Summit bank 24 3.1 21.9 United bank 180 34 146
  • 30. Exploring Stock Market Crashes 30 For full book contact fahimakhtar07@hotmail.com
  • 31. Exploring Stock Market Crashes 31 Major market players Arif Habib Grroup. One of the largest business groups of country. He has very important role in functioning and participation of market. The Arif Habib Group (AHG) ranks amongst the fastest growing multi-sector groups in Pakistan. This has been made possible by a proven record of a strong ability in identifying and developing successful business ventures and generating phenomenal returns despite subdued economic development. ------------------- ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------
  • 32. Exploring Stock Market Crashes 32 Mian Mansha Mian Muhammad Mansha is owner of Nishat group and an important figure of stock market. He holds control of Muslim Commercial bank, Adamjee Insurance, Dera Ghazi Khan Cement and Nishat Mills shares. His textile mill in Faisalabad under the name of Nishat Mills still is one of the biggest textile units in Faisalabad. . Apart from these large acquisitions, he was simultaneously expanding his Nishat Textiles segment, Nishat Textiles is Pakistan's largest fabric mill.----------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------
  • 33. Exploring Stock Market Crashes 33 Aqeel Karim Dhedee. Aqeel Karim Dhedhi, Chairman AKD Group, is widely acknowledged as one of Pakistan’s leading economic authorities. His innovative investment strategies have led him to become an iconic figure in Pakistan’s capital market. ---------------- -------------------------------------------------------------- -------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------.
  • 34. Exploring Stock Market Crashes 34 Interviews / Meetings. A number of well positioned officials, intellectuals and leading investors were interacted for research purpose for the completion of project. Views extended and opinion given by these people enabled the teams to form some conclusions with regard to sustainability and crash issues of market. Only a few amongst them have been picked for this paper and succeeding paragraphs will cover details of the opinion by these individuals.
  • 35. Exploring Stock Market Crashes 35 FLOW CHART – MARKET CRASH Foreign investment withdrawn Funds selling Index in pressure Margin calls for debt products crash
  • 39. Exploring Stock Market Crashes 39 1.
  • 40. Exploring Stock Market Crashes 40 2. When greed overcomes the market; no one talks about fear. Greed completely eclipses out fear and the fact that people usually have a short term memory also does quite a bit of good. In times of bull market rallies, people forget what it was like a few months or few years ago and what it meant to be fearful. Survey and conclusions drawn 1. Social Web Survey. A survey was launched on social website face book to ascertain the reason of causes of stock market crashes. Participants in survey were mostly active investors of stock market who gave their views with regard to market falling in crisis. Contents are mentioned in appendix 2. Options offered were:- a. Selling by foreigners b. Speculative buying c. Poor risk mechanism d. Risk or badla
  • 41. Exploring Stock Market Crashes 41 e. Insider trading f. Law and order and political instability. g. Effects of recession in international market. h. Bad macro indicator i. Prompt revision of rules and policies.
  • 42. Exploring Stock Market Crashes 42 2. Feed back from stock brokerage houses. All top stock brokers were contacted through e mails to get feed back from them purely basing on facts held in the form of data. Some of these houses have replied positively and conclusion drawn is:- a. Almost all investor suffering heavy losses were utilizing badla or leverage product. With the deposit of some amount 3- 4 times buying were held in portfolio of these investors. When market started falling sharply, their positions were sold to settle the margin falling in the account and this created more pressure. b. Instead of understanding the gravity of crisis, many investor were optimistic and were expecting market rebound and utilized leverage product to make more profit and later their holdings were forcefully sold by the brokerage houses. c. stock brokerage houses were having pressure from banks and investment companies side to maintain the margin and in order to ensure that margins were settled continuously.
  • 43. Exploring Stock Market Crashes 43 3. Views of Investors Suffered in Crash. A record of those investors who suffered heavy losses in stock market crashes was picked up from stock brokerage houses and CDC. Some of these investors when approached replied and assisted during the survey. Their feed back reflects:- a. Investors were mostly not apprehensive of market crash in the beginning and did not sell their holding in right time. Most of the stock on leverage were pledge by the brokerage house to maintain the margin. b. Decision to freeze market did not allowed investors to take decisions themselves rather market freeze created panic and when freeze was lifted they preferred to sell booking heavy losses. c. During crashes efficiency and services of stock brokerage house depleted to the extent that there was no one to guide investors with regard to their investment methodology. d. Most of the investors suffering heavy losses were not aware with the market mechanism and merely attempted to invest in market with the intent to multiply their wealth quickly. e. Investors were not aware with their rights and their expected response when their brokers were defaulted. It was an uphill task to put forward claims for compensation.
  • 45. Exploring Stock Market Crashes 45 Conclusions - Key Causes of Market Crisis 1. High leveraging has become a phenomenon in most global markets since mid-2000 and our market is no exception to this. Leveraged products with different titles are prepared and offered to investors to buy stocks 3- 4 times more than the cash they have in possession. In our market this product is known as MTS (margin trading system).An investors with a cash of Rs 100,000.00( one hundred thousand) is allowed to buy stocks of worth Rs 300,000.00( three hundred thousands) and even more in case of in hose badla offered by stock brokerage houses. When share prices fall investors are required to deposit the amount to maintain margins and failing in these they are required to sell their held stocks. High leveraging is one of the factors that contribute to stock market crash. 2. Sell-off was seen in our market by foreign funds in tandem with global market sell-off in the summer of 2000 and 2008.During 2000 and 2008 market passed through fear of recessions and were badly hit in which pries of commodities also came down. Crude oil came down significantly to half of its all time high. Our stock market also was subject to his effects and a continuous exit from foreign investors was seen. Sell off caused consistent pressure in index and took market down. 3. The composition of our indices is inappropriate and some stock particularly of oil and gas sector and mainly OGDC is index heavy stock. Any buying or selling in oil and gas sector and OGDC directly effects the index and turn sentiments accordingly. During all major crashes selling in OGDC which is
  • 46. Exploring Stock Market Crashes 46 often a top pick of foreign investors caused index to came down sharply and this falling down also contributed to crash. Composition of index inappropriately with very few heavy weight stocks offers players to cause panic like situation in market. This specially occurs when index looses much by selling in one odd stocks only first in a particular session cause bearish sentiments in investors. 4. Manipulation by a group, brokerage house or individual investors with hefty portfolio. This includes generation of very high activity of buying along with spread of rumours with brighter news on basic fundamental changes in dull stock stocks actually with no reality of any positive change. Later, when news were confirmed fake causing panic amongst investors with selling, the bears rules in totality. Our stock market is full with the history of stocks outperforming initially and falling nose down causing losses to small investor sin particular. 5. Insider trading has been a feature of our market. Insider trading is basically trading in a stock with privileged information. This kind of trade shifts entire market momentum in different order and hurts market and confidence of investors. 6. Some major investors also enter in market carrying black money or sometime with the objective of multiplying departmental financial situation healthy in quicker way. The investment in amateur pattern with no or hasty time frame also affected market in past.
  • 47. Exploring Stock Market Crashes 47 7. Foreign investment portfolio assumes significant importance. This portfolio is built by off shore accounts holders some time by foreigners and many time some domestic players operating portfolio accounts of abroad while sitting in Pakistan. A real foreigner investor invest with a lot of work considering valuation in our markets in comparison with other market taking into account internal political situation of country too. In our few crashes one of the reasons was uncertain of change on political canvas also. 8. Poor market mechanism is also one of the causes which also become reasons of crash. This ranges from application of all measures likely to affect market adversely ranging from financing to placing of circuit barkers at appropriate levels. Revision of gain limits in case of a particular stock in appropriate manner may bring imbalance sentiments in market environments and later proves harmful results. 9 . Lack of apprehension, awareness and education in case of a small investors. Small investors mostly rely on broker’s advice while forming their investment portfolios. Many time small investors do not follow any investment plan at all. Irrational decisions coupled with lack of know how caused heavy looses to investors particularly when the investment plans and portfolios were changed frequently in abrupt manners. 10. Fear and greed are two elements playing significant role for stock traders. Fear cause in panic selling and market greed force an investor to buy in leverage or badla and when market felt these positions are sold in loss causing more pressure in index.
  • 50. Exploring Stock Market Crashes 50 Recommendations 1. Leverage products time to time known as badla and MTS is required to be made more stable with incorporation of risk issues handling in extending of leverage buying specially to normal investors and banks. More liquidity to banks with debt availability may avert force selling and offer some stability to market in crash of crash. 2. Our education format of business management studies contain in adequate stuff for very important equity market mechanism including fundamentals, technical and companies ordnance. Revision of syllabus and incorporation of these topics will gradually assist in grooming investors base in future. Certifications and diplomas for stock market do not exist in Pakistan in required numbers and financial literacy is required to be enhanced to handle this issue. 3. Re composition of index is required with weight of stocks shifted in appropriate pattern. Rise and fall of a specific stock should not affect the indices extraordinarily and existing weight of oil based stocks may
  • 51. Exploring Stock Market Crashes 51 be shifted in balanced order. 4. Insider trade, market manipulation and other malpractices must be dealt with iron hands with more emphasis be given to investor’s protection and compensation issues when ever this kind of practice is seen. In this aspect all market regulators have to play an important role and devise policy that should eliminate the possibilities of insider trade. 5. Enhancing broker’s quality and capability must be done with imposition of strong penalties on violation of regulatory violations which should never be accepted. Broker and his representative establish the most intimate relationship with inventors in stock market and quality of services offered by brokers must improve. This entails persistent guidance of investors in all decisions and provision of quality research for the assistance of investors. 6. Some arrangements for guidance of new investors are essentially needed. Fresh investors coming to market must be cautioned to educate themselves before investing in market in which risk is always associated. 7. Regulators, brokers and other bodies must endeavour to make investors wiser with the tricky affair of trading on margins and they should be discouraged initially for some time to trade in leverage unless they get experience.
  • 54. Exploring Stock Market Crashes 54 Bibliography 1. www.kse.com.pk 2. www.pkfinance.info 3. www.scstrade.com 4. www.aia.org.pk 5. www.ismarpak.com 6. www.khistocks.com 7. www.investorsguide360.com 8. www.pakinvestorguide.com 9. www.tezimandee.com 10. www.thefinancialdaily.com 11. http://www.dailytimes.com.pk/default.asp?page=2007%5C05%5C0 4%5Cstory_4-5-2007_pg7_5 12. http://www.activetrader- links.com/directory/online_stock_brokerage_firms_of_pakistan.html 13. www.brecorder.com 14. www.akdtrade.com 15. www.bmatrade.com 16. www.kasb.com 17. www.cdc.com 18. www.economist.com 19. www.bseindia.com 20. www.bloomberg.com