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PSX’s Narrow Market Syndrome

Narrow Market Syndrome is a situation where few stocks, few intermediaries, and few Investors/Shareholders drive the major chunk of business. Evaporated Volumes, wider-spreads and vanished liquidity are the abetting conduits which deny exits and restrict entry to the very few investors who are still living in a forlorn hope that “Vibrancy will come to PSX SOME DAY”

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In terms of Average Daily Value Traded, we have reclaimed the position which used to be our normal outfit in late 1990. While the wider-spreads speak in volumes about the miniscule participation and rare Financial Inclusion. The Investor base of 250,000 (inclusive of “Ordinary Shares Subscription Account Holders”) is a mirror showing the Value which Capital and an ordinary man assign to the “WIFIM” – What is in it for me!!

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The Narrowing ratios of 13% and 26% of Investment to GDP and Market Cap indicate that Investment Climate is not very conducive. The low Marginal Propensity to Save is what lands us into the list of south Asian economies that are struggle to get rid of the vicious poverty cycle.

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There is a dire need to harness the potential of Financial Inclusion through Capital Market so as to address the challenge of low investor base and face the challenge of little Economic activity.

As the Investor Base continues to hover at around the same level for a large period of time, yet it is the “new capital” which is also shy of embracing the Capital Market. Out of around 550 listed securities, around 150 are on the defaulter counter and there is continued trend of delisting of Companies.

So, in terms of Investor base and Listed Capital—we happen to be an alcove (Stock Exchange) where same people (Investors) continue to wash the same cloths (Listed Companies) from the same laundry (DFM/MTS) for years and years.

It has been repeatedly stated that 20 members generally carry out the 80% of the trading-business. The small/long term Investors are least interested in day-trading, rare huge volumes do not mean that fresh entrants have embraced overnight, it is reducing trend of long-terms investors that leads to an all out perception that “day-trading has increased”.

The Narrow Product base of Deliverable Futures Market (DFM) and Margin Trading System (MTS) stocks account for nearly 60% of the regular market volumes. These are fantastic homegrown Products day-trading-products which help expand volatility, yet these products are not serving as a helping-hand to expand the Investor Base.

Higher volatilities are not bad for the markets—higher volatilities make markets fly and turn them into success stories, what they badly need is the wider participation of the masses. In case, if that does not so will, the Market is bound to vanish and evaporate after the sinking volumes and values.

These Products can really be meaningful and can take the Exchange to the pedestal of 2003-2004 when a single free float share was traded for 187 times (with highest ATVR and KSE remained world’s best performing market), but all that needs is the change of mindset. The Change of mind-set in terms of firm dedication and commitment to assure that a single rupee invested in the Capital Market shall remain safe, the participation in risker products is subject to a very strict criteria, and when Exchange is ready to squander a million rupees to find the owner of a single rupee whose owner is lost or died.

The Dividend payment of at least PKR 10 Billion are lying unclaimed with blue-chip companies for over a decade – shareholders either seems unaware of their payout or may have died. A fraction portion of the interest earned on this dividend payout money should be dedicated to Investor Cultivation Program and the objective of the Program should be to find the owners of these Dividend payouts and Investor Empowerment through nationwide “Investor Awareness Generation Program”

The repeated history of crises impresses upon the need for the Investor Empowerment so as to help Investors to look after their own interests and minimize their reliance on the Regulator. Indeed, consumer education is important in disclosure-based regimes, as consumers need to be empowered to know how to deal with disclosed information.

It is empirically evident (in case of India too) that private corporate sector saving does not lead to economic growth, and saving led investment of the sector collectively leads to economic growth, the ministry of finance officials in Pakistan should take concrete measures for capital market development through wider participation of the masses and empowerment of capital market participants.

The Wider participation is only way forward and an answer to many questions hanging over the Economy and PSX!!!

Sani-e-Mehmood Khan
Chief Executive Officer,
Securities Exchange Management Suite

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