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Pakistan stock exchange set to become top regional capital market in near future

SECP issues set of guidelines for investors and individuals to adopt a cautious approach

Pakistan Stock Exchange (PSX) has been converted into a regional capital market after selling 40 percent stake to Chinese consortium, which is a landmark in Pakistan’s capital market history.

While the Government of Pakistan is eyeing for becoming the top 10 economies of the world by year 2030, Pakistan Stock Exchange (PSX) can play a lead role in achieving the target, analysts told PAGE. They however, opined that an investment fund at PSX similar to Pakistan Development Fund needs to be set up.

While Pakistan Stock Exchange Index has already crossed 50,000, highest ever in the history of Pakistani capital markets, there is need to put in place checks and balances to thwart designs of vested interest elements.

Another positive development is that Pakistan stock exchange is going to introduce derivatives trading from the middle of 2017, which is expected to boost liquidity in the market and lure foreign investors.

The PSX saw its benchmark index soar 60-percent over the past year, making it one of world’s top performing indexes. In December, a Chinese-led consortium, made up of China Financial Futures Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange and two other firms, took a 40 percent stake in the business.

Pakistan was the world’s fifth highest-returning stock market in 2016, but the growth was driven by local investors, with the bourse eager to attract more foreign inflows, analysts said.

According to them, foreign institutional portfolio managers hold about a third of all freely tradable shares, while another third is held by domestic institutions, pensions and institutional companies. The market capitalization of the PSX is around $90 billion, although only about a quarter of that is freely tradable.

“Derivatives bring in more liquidity in the market and liquidity is good for exchange business because trading activity generates trading fees,” they said, adding: “Efforts are on to launch infrastructure bonds on the bourse to help fund huge projects and reduce delays, at the same time as allowing companies to fund capital expenditure more cheaply.”

Analysts anticipate boost in foreign investment after PSX’s inclusion in MSCI EM index accompanied by registration of Chinese companies in near future.

On other hand, international financial institute Credit Suisse, in its recent statement pertaining to PSX, has forecasted hike in profit generation from companies registered in PSX.

Foreign investors seem keen to benefit from PSX after witnessing massive bullish trend in world’s fifth best-performing stock market.

There is settled principle that transition from small to big business enterprise and from big to bigger business doesn’t happen automatically even in a rapidly growing economy. It requires vision, technical and managerial capability, aggressive marketing strategy and equally important, significant financial resources. For firms that can see the future opportunities unfolding before them but need more than internally generated cash flows or short-term bank borrowing, long-term funding via stock market is a relatively attractive proposition.

Investors are anticipating that the Chinese consortium that acquired stake in PSX will invest $85 million.

As per estimates, this investment will help broadening economic and financial collaboration between China and Pakistan apart from implementing the Belt and Road Initiative and the China-Pakistan Economic Corridor.

Market sources believe that the Chinese investment will bring experience, technological assistance and new products including options trading and futures trading may be activated.

Pakistan’s market reform has been accelerating in recent years and the country has received backing from global institutions and overseas capital, making PSX more appealing to global investors than before, analysts said.

 

On the other hand, China’s financial market has been opening up and getting increasingly connected to global markets. The Shanghai-Hong Kong Stock connect and Shenzhen-Hong Kong Stock connect are key to this opening. China’s financial market continues to open up, it is likely that there will be more collaboration between Chinese financial institutions and overseas ones, including the Shanghai-London stock connect, which is under discussion.

The Chinese-led consortium which acquired 40-percent strategic stake in Pakistan Stock Exchange includes three Chinese bourses-Shanghai-based China Financial Futures Exchange, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange. Together, they will take a 30 percent share. Two Pakistani financial institutions in the consortium, Pak-China Investment Company Limited and Habib Bank Limited, will take 5 percent each. The PSX was formed in January 2016 when the Lahore, Karachi and Islamabad stock exchanges consolidated into one bourse.

After the stock market crossed 50,000-point level during the trading activity on Tuesday, investors and general pubic need to remain cautious and avoid advice of manipulators who might misguide them.

The investors must deal with licensed brokers who are registered with the Securities and Exchange Commission of Pakistan (SECP). When market is showing a positive trend and rising day by day, there is a need to advise the investors and individuals to adopt a cautious approach.

While the SECP has also issued a set of guidelines for the individual investors, everyone must follow them to avoid losses. These guidelines are enumerated below:

1. Always deal with a licensed broker registered with SECP — Your investment with the unauthorized broker is at risk and prone to fraud; You may lose your hard earned money in the hands of unauthorized broker; PSX and SECP will not entertain your complaint, if you deal with unlicensed broker; You can verify the registration from the website of Pakistan Stock Exchange and License verification can be made by Jampunji SMS license verification service; for verification through SMS, send LV to 8181.

2. Trade only through your own Accounts with the Broker & CDC — Your investment is not secure if you trade through account in the name of someone else; You are at risk as you are not the legal owner of your money; You are prone to fraud if you are investing without having Broker’s and CDC accounts in your own name; Broker may use your money for churning in the market for his own benefit; Only legitimate owner and accountholders can file claim in case of default of broker; The SECP will not entertain your complaint, in case you traded through 3rd party accounts; Carefully complete your account opening forms and obtain their copies for your record and Ensure that your contact detail like address, email address and cell phone are correctly recorded in the account opening form.

3. Never authorize third party to operate your account — The authorization given to someone else to operate your account on your behalf can be misused; Authorized person may cheat you for his personal gain; Your money can be used for churning; Your claim will not be entrained by broker or exchange in instance of misuse of such authorization and the SECP will not entertain your complaint, in case of any loss due to 3rd party authorization.

4. Always make payments to broker by crossed cheque and obtain receipts — You may be cheated if you make payment through 3rd party cheques; Do not pay cash to broker; Payment through cash is illegal and SECP will not entertain your claim in case of default of broker and Always obtain periodical statements of accounts from broker, and compare them with your records.

5. Always maintain documentary record of your business transactions so as to protect your hard earned money — In absence of documentary evidence of your business transactions in the stock market, you may not be able to substantiate your claim or complaint against broker; Do not sign any document without fully understanding its terms and conditions; Carefully complete your account opening forms and obtain their copies for your record; Never forgo obtaining all documents of transactions, in good faith; Give Orders either in writing or on recorded telephone line of the broker; Always obtain periodical statements of accounts from broker and CDC, and compare them with your records; Obtain copy of schedule of applicable fee and charges from the broker for your record and You are at risk if you are not receiving “trade confirmation” within 24 hours from your broker of all trades executed in your account.

6. Never transact on ‘Tips’, insider news, rumors or media report — Investment on the basis of rumors, media report or tips may lead to loss of your hard earned money; Insider trading is a criminal offence and prosecution may lead to imprisonment for a term which may extend to 3 years or to a fine which may extend to Rs. 200,000,000 or 3 times the amount of gain made or loss avoided, or loss suffered by another person, whichever amount is higher; Always check financial statements of a company prior to making investment in its scrip; Do not transact, based on media reports, rumors, tips, or promises of guaranteed or high return; Take your time to research the stock before you invest. Never trade on social media tips where the recommendation is claimed to be based on inside or confidential information and Exercise extreme caution regarding social media post/messages that solicit an investment or provide information about a particular share.

7. Always maintain custody and complete control over your securities — In case of default of broker, your investment will not be safe; Open an account with CDC’s Investor Account Services (IAS) and subscribe to CDC online services for authorizing all portfolio transfer from your account and Use CDC’s Direct Settlement Service and settle your trades through IAS Account.

8. The investors are cautioned to avoid making an investment decision on the basis of research report issued by a person or entity not notified by the SECP.

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