What’s up at the stock market?

IN case you are thinking of jumping into the stock market given the sustained gains it has seen since July, be sure to ask yourself a few simple questions before you make any decision.

I rarely write about the stock market, and whenever I do, it is not flattering. Especially not when the market is in the middle of registering massive gains. The reason is simple. There is always a catch, and rarely do retail investors come out ahead.

The brokers are adept at selling stories. They have one set of stories for when the market is rising, and another set for when it is falling. When it is rising, their story will tell you how these gains have only just begun, how they still have a long way to go, and how the bad old days are over.

When the market falls, the stories will tell you there was never a better time to buy than this. When the dust settles, you will be left with the story and the broker will have your money. Of course, there are exceptions, important ones, but the majority of stock market brokers should be dealt with cautiously.

So what makes me suspicious of the current rise? Just ask a few simple questions. First of all, where is the rise coming from? You will notice something. From July to the first week of December, the market rose by around 22,500 points. Of this, more than 14,000 points were contributed by two major sectors only: banks and energy (I am including fertiliser in energy).

Automatically, you notice a lopsided growth here. More than 60 per cent of the growth in the market since July has come from companies operating in two limited spaces only. Does this mean the economy is booming? Or might it mean that something is happening in the world of banking and energy that is driving their earnings up?

Banks and energy companies have a high weightage in the KSE 100 index, so whenever their earnings go up, or their share prices move for any reason, they move the index quite sharply. Since July, the overwhelming majority of the reason why the index has performed so well is due to these two sectors.

In the first quarter of the fiscal year, from July to September, total profits after tax were reported at Rs417 billion, of which Rs149bn alone were from the banks, according to a research note put out by Topline Securities.

The other sector that saw a very large jump in its profit after tax comprised the oil marketing companies, who reported PAT of Rs30bn in the first quarter of this fiscal year compared to Rs844 million in the same period last year. That is a jaw-dropping increase. How did they manage this? “This substantial increase is primarily attributed to inventory gains,” the same note says.