Normally, a cut in the benchmark interest rate should lead to a spike in the stock market indices, as stock prices rise to reflect the sudden reserve-bank-dictated rise in profitability when compared with government bonds. However, the latest cut, from 25 percent to 13 percent, has been followed by a bloodletting on the stock exchange. The market closed with the Index up a modest 575 points on Thursday, but that was after a gain of 2671 points that indicated that the bear run was probably over. It seems that the decline was the result of profit-taking, as the market had already risen in anticipation of the interest-rate cut, as the reports had already come through of the fall in inflation, and thus the likelihood of a further rate cut. However, when the KSE-100 Index crossed 100,000 points at the end of last month, it had become clear that clear that the market was reaching its climax
The market correction may well have become overdue, as investors has booked huge profits, especially in the banking, automotive and oil & gas sectors, but generally across the board. It was time for profit-taking, which meant that everyone was looking to sell. As soon as the selling started, investors piled on. The signal seems to have been the latest tax legislation placing restrictions on non-filers of income tax. While some restrictions, such as buying cars above 800cc, re general, the restriction prohibiting non-filers from buying stocks affected investors. This is not to say that investors are nonfilers. Indeed, the biggest investors, the members of the exchange have firms which have long filed income tax returns, and which obliges them to file returns too. However, if just a few non-filers liquidated their holdings in a hurry, other investors, ll filers, would have followed, anxious not to be left with a mountain of scrip which had lost most of its value.
There have been instances of insider trading before at the KSE, and the present episode, which explicable by normal market forces, may have contained stock-owners making use of improper knowledge of the tax change. Though there are no suspects, the KSE should carry out a forensic audit of all transactions in the last few sessions. But apart from that, the government should learn that the ups and downs of the stock exchange do not reflect its performance. Those fundamentals do affect the stock market, but with time lag.
