Be cautious, warns Pakistani daily over bullish stock market

Islamabad - The Karachi stock market has seen spectacular gains, yet a Pakistani daily warned that there is a good reason to be cautious.

The Karachi stock market’s recent gains have "left some feeling giddy", said an editorial in the Dawn.

"The sharp increases amid economic and political gloom are bringing back memories of 2008, when the market shot through the roof in a similar situation. Brokers are quick to remind us that this time things are different," it said.

"Some point to ‘healthy profits’ being made, and the expectation of equally healthy dividend payouts. Others say that in 2008 leverage was strong, much of the investment in stocks was through borrowed money, and this time that favoured instrument of borrowing, ‘badla’ in brokers’ lingo, is outlawed. Others point to the higher-than-expected interest rate cut by the State Bank, saying that the money saved from debt-servicing cost will be available for shareholders instead," the daily added.

Yet, the editorial warned, there is good reason to be cautious. 

"It is worth recalling that the same brokers hyping up the present rally were also hyping up the 2008 rally till the very end. Indeed, it is a rarity to meet a stockbroker sceptical of these rallies, a fact that inspires scepticism itself," it said.

The editorial went on to say that Pakistan’s stock markets are "famous for the ‘suckers’ rallies’ and in every case, it is the small investor who loses at the end". 

Most of the rally thus far has been centred on ‘penny stocks’, "small outfits that nobody had heard of until recently". 

"It is hard to see how fundamentals are driving this surge, and small investors would be well advised to exercise caution. This could easily be another bull run that leads straight to the abattoir," said the daily.