The benchmark index of Pakistan Stock Exchange (PSX) posted 1.6%MoM gain during October 2018 and closed at nearly 41,650 points, after posting decline for two consecutive months. This reversal, though of a smaller magnitude can be attributed to the successful diplomacy of Prime Minister, Imran Khan in Saudi Arabia that resulted in Saudis approving US$6billion package and expectation of packages from China and United Arab Emirates (UAE). During near term performance will depend on actual transfer of funds, and signing of a package with International Monetary Fund (IMF). Though, prospects of Pakistan’s entry into an IMF program are bright, imposition of some stringent conditions can’t be rules out. Foreigners remained net seller, liquidating more than US$86 million worth of equities. Despite disappointing results, Cements and Commercial Banks fueled buying at cheaper valuation. Oil & Gas and Automobile sector witnessed some decline amid lower oil prices and concerns over margin erosion respectively.
Pakistan’s Benchmark 100 Index performance can also be termed a tale of two halves. The month open on a bearish note due to: 1) macroeconomic uncertainties, with external agencies highlighting potential risks, and 2) NAB inquiries against top leadership of mainstream political parties, weighed on investor sentiments. The second half was almost the opposite with Index ascending from a low on the back of US$6billion package from Saudi Arabia and with the expectations of another package from China that would pull the country out of would position the country to avert inevitable balance of payment crisis.
The market was flushed with liquidity with average daily turnover rising to 293 million shares, with daily traded volume valued at US$59.1million as compared to that of US$43.6million in September 2018. Market activity was also skewed towards blue chip stocks. Foreigners continued to be the net sellers following EM market sell-off with major outflow recorded in banks (US$44.2mn, the 6th consecutive month of selling). The selling was primarily absorbed by Companies (US$33.2million), Mutual funds (US$20.6million) and stock brokers (US$6.15million, net buyers after six months).
The recovery in the market’s overall performance was led by Cements and Commercial banks, despite disappointing earnings. Investors’ interest was fueled by cheaper valuation. Rupee depreciation of 7.5 percent during October 2018 made it the worst performing currency in Asian markets but brought interest in power and textile sectors. Oil and Gas sector retreated by 2.4%MoM amid oil prices turning choppy on signs of rising supply concerns. Auto sector lost 10.3%MoM due to rising concerns over demand slowdown and consequent pricing pressure to pass-on currency depreciation impact.
According to an analyst, “we should not view the performance of Pakistan’s capital market in isolation. High volatility was also witnessed in leading market around the globe due to the mounting fears of Sino-US trade war, noise resulting from killing of Saudi Journalist in Turkey, approaching date for re-imposition of sanctions on Iran, prevailing oil glut and forecast of economic slowdown around the globe. The pressure in Pakistan was more prominent because of a small shareholders’ base, following herd mentality and political noise.”
Privatization for people
It has been reiterated repeatedly that Pakistan market needs two impetuses: 1) listing of capital having last paid up capital, including state owned enterprises and 2) sale of shares of state owned companies through stock market. Many of the private limited companies have significantly large ‘shareholders’ equity’ though the paid up capital is small. As a first move all the sponsors of private limited companies having more than Rs500 million shareholders’ equity should be asked to list their companies at the local bourse and sell 25 percent of the share to general public. However, some incentive should be offered to the sponsors of private limited companies to list these companies at the local bourse. The tax rate on public limited companies should be brought down to 20 percent immediately.
In the second phase entities like State Life Insurance Corporation, National Insurance Company and Pakistan Railways should be listed and 25 percent of their shares should be sold through PSX under “Privatization for People” program. In the past the Government of Pakistan has exercised this option and the response from general public was enormous. The logic behind making such proposal is that the beneficiaries should be the people of Pakistan and not the outsiders.
While the above stated two plans may take some time, the easiest option is to sell 10 percent shares of all the listed state-owned enterprises through ‘secondary public offering’. The state-owned enterprises have been created from tax payers’ money and they have the preemptive right to buy their shares either through ‘initial public offering’ or ‘secondary public offering’.
Let one point be made very clear that the biggest opponent of privatization of state owned enterprises is the top hierarchy appointed by the politicians and the employees enjoying support of the political parties. The reasons of virtual bankruptcy of PIA and PSM are corruption, embezzlement and over employment. On top of all, the successive governments have failed in privatizing electricity generation and distribution companies because there was no will. The situation must not be allowed to prevail over.