THE strong bout of volatility that just hit the Karachi Stock Exchange shows that the country’s capital markets continue to have fundamental weaknesses in spite of a decade of reforms.
According to market players, the volatility began when a foreign fund began pulling out its money, said to be around $130m, for reasons of its own. The outflow, hardly a large amount, sparked panic which went out of control very quickly. Company fundamentals had no role to play in this.
The month of March saw $87m pulled out by foreign investors with normality returning when $2m flowed in on March 30. The amounts are tiny, but the swings they were able to spark were very large, showing the market’s vulnerability to sentiment.
The community of brokers has already been on edge due to some actions taken by the regulator to stem wrongful practices such as insider trading and front running.
The edginess is a clear indicator that such practices remain an important part of doing business in the stock market, and the powerful storm of sentiment that just swept the trade floor shows the weak footing on which the market stands.
Small investors should continue to look at the stock market as a place to keep their savings, but the vulnerabilities show that it would be better to take a long-term view and not become easily spooked by the wild swings that are the hallmark of the stock market.
Between speculative swings, panic withdrawals and wrongful practices, the stock market remains a good place from where to secure a decent return on one’s savings, but only if one has the staying power to remain in the game long enough.
Swings of this sort tend to wipe out small investors with no staying power, and that is one reason why further reforms are necessary to ensure that sentiment remains as tightly chained as possible, and wrongful practices are duly prosecuted. In the meantime, let the buyer beware.