It seems as if there will be no quick recovery in the investor confidence that was shattered post 2008. Volumes had dried up and a revamp had seemed improbable under the prevalent circumstances, but appreciatively, sense prevailed! Securities and Exchange Commission of Pakistan, showing compassion for the investors, raised their concerns with the highest authorities in a bid to reinstate the lost hope of redirecting funds towards stock markets.
Although a reactive correction has been witnessed, it remains to be seen how long this prevails. The measures taken are due to be effective post-April and the current upsurge might as well prove to be a masquerade, if anything. Advocates of Bulls are strongly presenting a case of an uptrend in the index, with predictions citing the 14,000-points mark as the short-term target. Not to forget, we are still in Pakistan and a week of healthy activity will not suffice for the business lost in the preceding years.
However, there are horizons which are still to be re-tested by the investors. I emphasis the term ‘re-tested’ because this tactic was used abundantly by investors previously, but has failed to gain attention as of late. For activity to increase, it is highly important for players to test the ‘futures’ market more frequently to benefit from the advantages that follow. Although future contracts are not available for every listed company, the list does entail all major components of the benchmark index. The current economic scenario does not allow investors to oblige tons of cash at the bourse and thus the dried-up volumes in the ready market. Buying shares in the ready market will require a full payment within two days of the transaction, after which the delivery is called. Short selling, on the other hand, is not an option in the ready market!
This is where trading in futures becomes beneficial. Even though the prices being offered are at a premium, because of various factors including mark-up and time value of money, the opportunities that are swathed above the premium. Foremost, the cash-starved investors only have to deposit a margin against the entire amount of the contract undertaken; relieving them of the burden of holding their most precious asset is an era where liquid assets are considered to be the most precious investment.
With only a minimal percentage of the total contract value being held by the broker, the investor can unreservedly sell or buy contracts, which will be settled on the last Friday of every month. The last full week of the month will open space for investors to settle their current contracts and take a new position for the subsequent month. The premium prices on offer can always be used to an advantage by the investor. If, for example, after including the weekly commission of the broker and the relevant taxation charges, there is still enough gap in the value being offered in the ready market and the futures contract, a quick-witted person will sell the scrip in the future and buy it in the regular market, guaranteeing a profit. However, both positions will need to be settled separately.
This situation does not arise often, and is usually on offer when there are extreme or unforeseen movements in the market. This situation can also be referred to as ‘arbitrage’, but the reason I did not use this term was because of the inability to short sell in the ready market.
Plowing this tactic minimises the risk involved because of the co-relatedness of both markets. Usually, at the settlement date or close to it, prices in both markets converge to a fair price, reflecting that the movement in both is proportional. There are occasions, but rare enough, when futures contracts are being offered on a discount. Although making use of arbitrage will not be possible here due to the current rules of the Exchange, where selling without taking a position in the ready market is forbidden, the investors have the option of taking a long position with only blocking a minimum amount and then settling the position as per the defined target, or the best price. The element of risk is minimised again because, rest assured, the offer price for a futures contract cannot persistently stay below of what is being offered in the regular market. The need to find new horizons, or unexplored areas, is immense and with the US dollar trading above the Rs90 mark in the open market, there is always room for fresh funds to enter the market. The Index is trading at its low levels and the prices being offered are attractive. With defined levels of risk, investors can always play it safe.
The writer is head of strategy at first national equities. He can be reached at [email protected]
