Monetary tightening fear haunts market; 454 points lost (29072008)

LEADER REPORT
KARACHI: Panic was seen across the board on Monday after bears consolidated their position at the Karachi Stock Exchange pulling down the share prices by 454 points from the benchmark 100 Index which finished the day at 10,578.
The fear related to further increase in discount rate was the primary reason for the selling pressure.
The other factors affecting the market are also related to monetary tightening and the deteriorating macro economic indicators such as rising inflation, depreciating rupee and flight of foreign capital.
The primary reason for the hike in inflation is due to the growth in money supply which was basically due to the massive increase in government borrowing and hike in international food and energy prices, while the inflation due to the food and energy prices has not fully impacted.
The flight of foreign capital is due to the weak or no confidence of the foreign investors on the political and economic front of the country, as the investors do not see stability in the government and no improvement in the economic situation. The law and order situation in the country contributed to the shattered investors confidence. The foreign investor portfolio investment of the last session showed an outflow of USD 11 million.
The Rupee maintained its slow depreciating stance. The expected raise in discount rate will further suck the liquidity from the inter-bank market and provide stability to the Rupee. However, the further rise in interest rate will adversely affect the banking sector and its profitability, as the demand of borrowing will decrease due to the increase in cost. The impact was seen on Monday as almost all banking scrips closed hitting their lower circuit breakers, with exception of BOP, the extremely undervalued scrip.
SBP has made crop insurance mandatory for the borrowers, at a maximum premium rate of 2 percent.
In the recent trade policy the Prime Minister announced subsidy for small farmers on insurance premium. The government had allocated Rs.200 bn for Agri Loans in recent budget. This huge allocation will contribute approximately 4 bn premium to the leading insurance companies. Agri insurance is a new segment for the insurance companies, so the claim ratio chemistry is still unclear. Last year Rs 160 bn was allocated in FY07-08 for agri insurance but just Rs 93 billion was availed. However, the major insurance companies followed the bearish sentiment of the market and closed hitting their lower circuits.
The major threat to the market is the monetary tightening, while the fund created by the regulators is expected to provide support in the crisis situation of the market. However, no support was seen in the crashing situation on Monday. The government needs to take measures to improve the economic situation of the country, decrease its borrowing and regain the investors confidence. We recommend investors to keep a cautious stance and invest in E&P, Fertilizer, Power, and Telecom sectors and after the clearance of the monetary policy uncertainty, in first tier banking scrips.