Chairman Securities and Exchange Commission of Pakistan (SECP), Zafar Hijazi, while talking to the media warned small investors at the prevailing bull market in the country’s stock exchanges urging them not to put blind trust in brokers. His irrefutable argument was that a bull market does not necessarily reflect a sound economy or corporate sector, though he hastened to add that the recent market surge is not a bubble or based on weak foundations but the “result of our efforts of the last two years that mutual funds are strong and stable to support the market growth.”
The question is why did Hijazi feel the need to give the warning at the present moment of time? As he explained “previously the foreign buyers used to dominate the market but now despite a selling spree the market is growing.” The SECP revealed that from 1st November 2016 to 23rd January 2016 foreign portfolio investment offloaded stocks worth a massive Rs 38.6 billion, the banking sector sold shares worth around Rs 89.7 billion, brokers Rs 500 million and other organisations sold their holdings of Rs 2.5 billion. And during this very period, individual investors bought shares amounting to Rs 14 billion, mutual funds bought Rs 23.8 billion worth of shares, companies’ 7.6 billion shares and NBFCs 5.8 billion shares. This, as per Hijazi, indicates that “local players are strong to counter selling pressure triggered by foreign investors who still account for 43 percent of market presence.”
Be that as it may, Hijazi’s warning to small investors was that brokers manipulate the market to attract their capital through a surge but their overriding objective is to take profits which, unfortunately, are at the cost of the small investor. He proceeded to provide eight guidelines to small investors to forestall being manipulated by the brokers: (i) deal only with licensed brokers, as all others are not answerable to the stock exchange or SECP; (ii) trade with your own account, not a benami account as that alone would entitle you to file a complaint; (iii) do not authorize a third party to operate your account; (iv) pay brokers through a cross cheque and not cash; (v) maintain documentary record of all transactions; (vi) do not make any transaction on tips received, insider trading, which is illegal in any case, but may well be inaccurate; (vii) maintain custody and control over your securities; and (viii) do not invest on the basis of dubious research reports defined as one not notified by the SECP. At first glance, these are all commonsense guidelines and are as applicable in this country as they would be abroad in markets that are more developed than ours. In Pakistan, however, the danger of a prospective investor is greater mainly because of our large parallel illegal economy that is constantly in search of avenues for whitening black money.
In this context, it is also relevant to note that Federal Finance Minister Ishaq Dar has constantly referred to a buoyant stock market as an indicator of the success of his policies; and has largely ignored cautionary notes by independent economists that brokers are manipulating the market, with the small investor the easiest to be manipulated, and that his low tax on this sector - generating no more than around Rs 5 billion per annum when the potential is closer to Rs 100 billion if the same tax rates as are applicable in neighbouring India are applied – needs an urgent revisit. Additionally, as Mahathir Muhammad noted after the 1997 financial crisis which impacted on the Malaysian ringgit and the stock market, foreign portfolio investment can leave the country overnight while domestic small investors can lose all their life savings in the stock market overnight. Thus one must appreciate Hijazi’s words of caution and hope that the small investors heed his sane advice.
