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Budget’s view at Capital Markets

Over a thousand points decline in KSE-100 index suggests that the Budget has failed to fetch the interest of Investor in the Capital Market. While political uncertainly and gruesome turmoil is keeping Investors away from the Market, the Shareholder of PSX are busy looking at new Management and gazing at latest Financial Results of PSX.

The ostensible reason for a substantial decline in the PSX revenues is owing to a trend of decline in income from the areas of Exchange Operations, New Listings, Interest and Rental Incomes. However, a careful analysis would reveal that this decline of 32% in revenues of the PSX is mainly because of a declining trend in rend in terms of the volumes at the Exchange which is the basic driving force for betterment in the heads of income belongings.

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When we look at the volumes diligently, it would appear the situation has started to deteriorate further after the holding of the PSX Board elections, as the volume have peaked down to the level of 50% from the days when PSX elections were held. The vibrancy and liquidity was a hallmark and a sign of identity which brought the title of “World’s Best Performing Market in 2003 and 2004”

Leverage, Fluctuations and Speculations are the glaring sources of vibrant, liquid and efficient markets as one cannot imagine a Capital Market to survive and thrive without these core elements. However, these are amongst critically essential elements, it is expedient to ensure that Leverage is Controlled, Speculation is without manipulation and Fluctuations are manned with quality entry and safe exit to investors.

There is an altogether new phenomena unleashing these days, and what becomes worrisome with this phenomenon is the syndrome that we fail to observe any substantial support or value buying for continuous arrays neither from institutions nor from those who believe in fundamentals or technical.

The depressed volumes at Stock Exchange may have been due to uncertain political situation, however, the element of Product Diversification cannot be ignored. The two reports of Securities and Exchange Commission of Pakistan (a) one on the subject of Derivative and (b) one the subject of Exchange Traded Funds needs to be looked into from the mind-set of implementing the right recommendation without any further delays and loss of time.

 

While actions are taken to rejuvenate the existing Derivative Suite Products, and Exchange Traded Funds, there is dire need to embark upon a state-level-strategy to Market Pakistan in in MENA, European and North American region. With strategic intent and sound policies, we can become the world’s 16th largest economy by 2050 based on the GDP at purchasing power parity. Projections depict that this may mean that Pakistan will overtake economies such as Italy and Canada, which are at present ranked at 12th and 17th, respectively.

However, realizing this growth potential also calls for implementation of structural reforms to improve macroeconomic stability, diversify the economy away from undue reliance on natural resources, and develop effective political and legal institutions.

Measure proposed in Budget

There are definitely policy signs that indicate a more friendly business regime in Pakistan for Foreign Investments. Some of these initiatives are bound to enhance the confidence of the international business community to consider Pakistan as a long-term investment destination. Notable measures include:

Tax amnesty scheme:

The Finance Minister announced amnesty scheme with a view to encourage Pakistanis to bring back some of the capital that was taken out of the country. If one were to go by the views expressed by eminent columnists, an estimated inflow to the tune of USD 10-12 billion dollars could come back into the mainstream Pakistani economy. This would definitely boost trust in the economy.

Over half a dozen amnesty schemes have been announced since 1958, the one which was announced in 2008 resulted into a tax collection of PKR 2.8 Billion.

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This scheme like many other past schemes is being inducted through Ordinance and lack of interest from Parliament would once again confine this initiative to the Existing-Ruling-Elite as they know “the benefit of disclosure with Ordinance validity period”, while rest of candidate remain uncertain.

While the overall economic situation in Pakistan is not very buoyant, equities as an asset class seem to be on an upswing with the currency devaluation in recent times.

In light of these factors, it is critical that the political leadership realise that increased inflow of foreign capital will enhance the allocative efficiency of the capital, and will give an upward thrust to domestic stock-market prices. The Foreign Portfolio Investment (FPI) has an impact on the price-earnings ratios of the firms, a higher P/E ratio leads to a lower cost of finance, and stock purchases on the secondary market can result in a higher amount of investment. The first impact is to increase the price of the shares rather than the flow of funds to the companies that wish to increase investment. Increased wealth of local investors will eventually enhance consumption. This way some amount of capital inflow can be directed towards consumption.

Pakistan’s economy presents prospects and a challenge which call for an all-out strategy to attract foreign inflows – be it in the form of amnesty scheme or in the form of FPI – through a sustained and aggressive marketing of Pakistan across the Middle-East, Europe and North America.

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