BM: Would you like to discuss recent market activity for our readers please?
Ans: The market has been very active.

BM: Thisweek we saw a rather bullish activity in the market after a very long period of time, and the volumes were very surprising, touching a very high level after almost ten weeks. Apart from that we saw a different kind of approach as far as foreigners are concerned, and we saw net buying in the market. What would you like to say about that? Do you think the positive activity in the market was because of this news or some other reason?
Ans: I think everything has a certain background and we have to look at a couple of things. First, we have to start from early June when the budget was announced. When the budget was announced, for the first time there was confusion as to whether the CVT was being removed, or the FED has been imposed and there was an uncertain sentiment in the market. People did not exactly know what the implications of the FED were going to be, and that I think was the sole reason because of which the broker community was showing that kind of sentiment.
But if we analyse the market trend, regardless of the uncertain sentiment, we saw the market consolidating. The market could have fallen because of that trend and it would have been very easy for it to fall too, but the point is that it did not fall. I think on the hind side, we can see that the market always keeps on giving signals, and this time it was giving very, very clear signals that a rally is due, FED versus CVT in terms of financial impact would not actually be great.
The second thing is that the market is probably more on the yield perspective. So the indications that were being given culminated at the end where people thought that the up-selling would have finished and the capital gains would have been booked, and yes there was a certain indication from the foreigners as well, but it was not all that big.

BM: So do you think the buying that was seen in the market was from the new fund managers or the old ones?
Ans: That is not necessary. I think the agitated fund managers were not even able to do any selling, and they were not able to do that today either, I think they have plenty of holdings. I do not think that most of them sold much at all. I think you must have read the statement from Mark Mobius at the beginning of the month, where he did not talk about Pakistan, but you know their specialisation is the emerging market.

BM: So where do you think this approach has changed? What steps do you think the government should take to attract the diverted foreigner attention?
Ans: I think there are two or three variables because of which this happened suddenly. I am not sure about Pakistan, but if you talk about the emerging markets, it is like a basket and Pakistan is automatically included in that. That basket became interesting because the indicators that became the cause of a disaster, primarily to curtail the money supply, they are giving clear indications of reversals. And this is happening not only in the Pakistani economy, but also in the economy worldwide. The overall money supply is being improved and efforts are being made to improve it further globally.

BM: I do not think we can see that in Pakistan yet.
Ans: True, the money supply here is not being made better but the is definitely a trend reversal. The national saving rates has decreased and you have to understand that the trickle down impact can not take place in a matter of a weeks, but there were a lot of people who used to go into the national savings and they were getting 15 to 17 percent return. Obviously that flow is going to divert somewhere else. That pool of money is obviously going to divert elsewhere and as I said earlier, there was no exit in the real estate, and a relatively better exit is available now. Whenever that money gets free, it will definitely be used somewhere else.

BM: Do you think that money is being diverted towards the Karachi Stock Exchange (KSE)?
Ans: I am not exactly sure whether it is being diverted towards the KSE or not. As I said earlier, the trickle down impact of any economy does not take a week; it takes about six to eight months. These pension funds, provident funds, mutual funds and leveraged funds actually decide where their returns are relatively better. This, I can tell you that the people who were earlier intimidated by the stock, are actually taking on the market at 70-80, while previously they were afraid to do so at 40-45. That was because that panic in their minds and the misconception that stocks are the most disastrous thing in the world, has been cleared out and that fear-factor is gone.

What is left now is how many allocations will there be? I say there will be allocations but slowly and gradually. People will go towards the risky products and a huge factor will yield from there. So I think that the interest rates will play a role. Mobius said the same that in the second quarter of the fiscal year, he fears that there is going to be an explosion of money supply in the emerging markets, which actually means two things. He is saying that the oil prices will somehow settle around $70 to $75 per barrel. This is the point where the Arab economies go above and this is the surplus money that gets diverted to the financial markets.

BM: We have heard a lot of different views from the people, some of them think that if we see a decrease of 100 points in the market, there will be no positive impact of this on the market as such because the market has already discounted that. Others think that if there is a decrease of 150 to 200 points, it might have some positive impact on the market. What is your forecast?
Ans: You are talking to a lot of people who are relatively short-term players, you call them punters. Then you have spoken to people who are relatively medium-term players like us, we might not be very long-term players.

BM: Because there is a certain pressure from the IMF not to lower the discount rate too much now.
Ans: Yes, but if you look at it sensibly, you will see that the fuel prices have recently increased. I think the rate at which inflation is supposed to go down, probably would not be met. To bring it to a single digit, there have to be certain factors. As analysts, we say that if you have increased the petrol price by Rs 6, Ramadan is coming up and I do not see the food prices going down any time soon. Only the interest rates will go down, and by interest rates I mean that some financial costs of the companies will decrease, and that too will happen some time in 2010.
It has only just started today; we will be able to see the real financial impact in the year 2010. I do not think that the inflation rate will come down significantly during the next two months. Common sense says that they might not decrease the interest rate on the basis of the current inflation rate. I think 1 to 1.5 percent is a fairly good step if this happens, and you are very right that this will not be a strong trigger for the market. But as I said, since it has already been discounted, the market will not fall that rapidly either. But this is not the thrust because of which the market would show significant positive activity.

BM: 7,500 points was declared a very crucial level in the market, some people think that if this figure sustains in the market, we can hope and look forward to the next level of 8,000 points. The market has already increased by 400 to 500 points this week. What would you like to say about that?
Ans: We are talking about where we are hoping to see the market in the future. There are people saying that the market can go up to 8,000 points by next month, but I do not think that is possible.

BM: Any particular reason as to why that would be?
Ans: The simplest reason is that our expectation that inflation rate will suddenly go down and people will return to the market, will not materialise anytime soon and it is going to take some time. But trend reversals, whether they are of inflation or interest rates, are on the down turn. The market has done a 110 percent re-rate and it will keep doing so. I do not see much a decline. I think the market looks very positive on the medium-term which means if you are talking about September or October, then I think it would not be a big deal for the market to reach 8,000 to 9,000 points. I do not think that the fundamentals will change drastically any time soon.