INTERVIEW WITH MR HAROON ASKARI, DMD KSE
Oct 22 - 28, 2012
PROFESSIONAL HISTORY AND EXPERIENCE?
Deputy Managing Director & Chief
Operating Officer (Head of Operations), Karachi Stock Exchange (Karachi,
Pakistan), from 1st May 2011 to present.
• MBA (PGD). Business
Administration, Institute of Business Administration, Karachi, 1973.
The Bull Run in Pakistani market started from January 26, 2009 when KSE 100 Index hit a low of 4800, after 2008 financial crisis that affected all markets of the world and caused prolong market closure in Pakistan. The market steadily increased and Index reached at 12658 points on January 18, 2011. However, the market went into consolidation phase in 2011 where prices remained range bound with extremely low volumes. People attributed this lack of interest in the market to various factors that included Capital Gain Tax and its mode of collection, high interest rates, tight monetary policy and lack of leverage product in the market. On January 21, 2012, the Federal Minster for Finance in consultation with the Chairman Securities and Exchange Commission of Pakistan (SECP) announced important measures to help the economy and address investors' concerns that included Rate of CGT shall be frozen at the existing 10% on securities held for six months and 8% on securities held for a year till June 2014 and changed the mode of collection of CGT, where National Clearing Company shall act as a collecting agent and deduct and deposit the CGT from all retail investors on their transactions. Also allowed changes to new leverage products to assist liquidity in the market. These measures were highly appreciated by the market participants and as a result, the market improved a great deal in terms of prices and volume. The year 2012 witnessed a strong recovery of Pakistan capital markets. Further, the strength of our stock markets reflects improving macroeconomic fundamentals, attractive valuations of listed companies, strong investor confidence locally and worldwide. Growth of the Pakistani economy has been facing challenges however, it is improving day by day and this year it is estimated that the economy will achieve growth of above 4%; this increasing trend in the GDP growth will surely support the increased activity in the capital markets. Net capital inflows have been steadily increasing by investors in particular the international investors. The portfolio investment of foreign investor has reached almost US $ 3.5 billion, which is 30% of Free-Float capitalization of the market.
PAGE: HOW WOULD YOU COMMENT ON RECENT BULLISH TREND IN CAPITAL MARKET?
PAGE: WHAT ARE YOUR VIEWS ON FOREIGN PORTFOLIO INVESTMENT IN KSE?
HAROON ASKARI: Pakistani capital market has benefited greatly from the inflow of International Portfolio Investment (FPI), as a result of Government's investor friendly liberal investment policies. FPI contributes positively in the development of an efficient capital market and brings several benefits to the host country. Increased FPI leads to greater liquidity in the capital market, resulting in a deeper and broader market. The spill-over effects of positive competitive pressure to attract foreign investment would necessitate higher standards, better work ethics and better corporate governance and greater business transparency, resulting in stronger investor protection and thus enhanced investor confidence. Increased liquidity in the capital market also means better access to financing at lower cost of capital which is crucial to support economic activity. In this regard, the inflow of FPI into the stock market helps to ease financial constraints of firms. Studies relating to FPI and the domestic stock markets show favorable contribution of FPI in supporting the local stock market. The multiplier effect further spreads the impact of growth in the stock market through the wealth effect. In this sense, capital flows act as facilitator to economic growth and contribute towards increased wealth creation. Ultimately, better access to financing provided by the free flow of portfolio investments contributes to efficient allocation of capital. Foreign investors can freely trade in the shares quoted on the Stock Exchanges in Pakistan and debt instruments including in Treasury-Bills, Federal Investment Bonds (FIBs), TFC's etc. For this purpose, foreign investors are required to open a Special Convertible Rupee Account (SCRA) with authorized dealer in Pakistan and this account need to be fed by remittances from abroad. Despite its numerous advantages, in certain cases, the FPI could also have adverse effects on the host economy. The potentially damaging aspects of FPI are rooted in its nature which is short-term and thus also volatile we call it "Hot Money", FPI volatility has often been quoted as the major reason behind stock market distress, leading to financial crisis. Lessons learned from past crises show that large and abrupt reversal of portfolio investment by foreigners often causes panic in the stock market, since it is taken as an indicator of approaching financial crisis. Nonetheless, the long-term gains of FPI outweigh its short-term ill effects and there is no doubt that FPI bring real benefits to the growth and development of the domestic financial markets and the economy in general.
PAGE: YOUR VIEWS ON REGIONAL MARKETS:
HAROON ASKARI: Markets in our region include India, Bangladesh, Sri Lanka, Turkey, Thailand, Malaysia, Singapore, Philippines, Indonesia and Vietnam. These markets produced the best stock market returns since global markets started to rebound three years ago, as investors sought a haven from Japanese, United States & Europe's debt turmoil and their volatile stock Markets. Stock Market of several of the above mentioned regional countries out-performed the stock market of developed countries and is considered among the best performers in terms of stock market higher returns. These economies have experienced better growth rate than what we see in the other more developed European & North American Economies. I believe that Asian countries' (Ex Japan) growth story will probably continue for next decade, as the Asian governments have increased spending on infrastructure and stepped up efforts to enhance their domestic consumption in a bid to reduce their reliance on exports revenues. According to Bloomberg, the Philippine Stock Exchange Index (PCOMP) produced the second- highest total return with the fifth-lowest volatility for a risk-adjusted gain of 7.2 percent over the three-year period, the best in the region. Thailand ranked second, helped by the highest total return and average volatility. Singapore was fifth, with a risk-adjusted return of 2.3 percent. Indonesia, Malaysia, Thailand and the Philippines also topped the risk-adjusted return ranking over the past five years, with Malaysia posting the lowest volatility and the Philippines having the fourth-lowest price swings. In the past three years, Southeast Asia's economies have seen average quarterly growth rates of between 1.8 percent in Thailand and 6 percent in Singapore, compared with average growth of 0.6 percent in the U.S. and a 0.3 percent contraction in the euro region, according to data compiled by Bloomberg.
Five Asian economies -- Indonesia, Thailand, Philippines, Malaysia and Vietnam -- along with China and India will outpace the rest of the world over the next two years, the International Monetary Fund said in an April report. In 2013, the Asean-5 will grow 6.2 percent, compared with 2.4 percent in the U.S., 0.9 percent in the euro area and 1.7 percent in Japan.
Faster economic growth has fueled stock-market gains and valuations. The MSCI South East Asia Index has rallied 13 percent this year, including dividends, and more than doubled since 2008. The MSCI Asia Pacific Index has gained 3.8 percent in 2012 and returned 43 percent since the end of 2008.
PAGE: YOUR COMMENTS ON MONETARY POLICY AND ITS ROLE FOR CAPITAL MARKET:
HAROON ASKARI: A tighter monetary policy leads to an increase in the interest rate and at this rate the firm's future earnings are capitalized, and investors compare the earning with risk free interest rates this result in stock prices decline. While the easing of the monetary policy reduces the interest rate and company's profit look very attractive as compare to risk free interest rate this increases the overall level of economic activity and stock price responds in a positive manner.
Monetary policy of Pakistan is now supportive of the dual objective of promoting economic growth and price stability. It achieves this goal by targeting the money supply in accordance with real GDP growth and inflation targets set by the Government.
Present pro-market monetary policy of SBP and its implementation has improved economic development scenario substantially, benefiting from the series of policy rate changes. The State Bank of Pakistan lowered the discount rate to 10 percent from 10.5 percent, this is an important departure from the preceding few years' monetary stance. After 3-4 years of tight monetary policy. Has this monetary tightening achieved the desired results i.e. of curbing inflationary pressures? Latest trends of CPI are comforting but will this continue? There is a general consensus that inflation will remain about 9 to 10% in near future as Food inflation remains the biggest challenge, therefore further monetary easing would be difficult. In evaluating the effectiveness of the monetary stance on inflation there is need to recognize some economic realities and complications which eventually help in developing an appropriate policy response.
Private credit off take has been very poor for last few years since rate of interest was high, second domestic savings have gone down since taxes on essential items like electricity, public transport, telephone, vegetables, medicines have gone up, so people are forced to spend more . On the other hand, due to narrow tax base the economy, Pakistan has been facing poor growth of revenue for a number of decades, which in turn forces the government to rely on continuous borrowing both from internal and external sources to finance the budgetary deficit and due to recurrent government borrowing economy is burdened with public debt. If surge in the government spending is not accompanied by increase in government revenue and proportionate change in real GDP, it may create public debt and inflation. Moreover, the higher government spending may put upward pressure on the interest rates and discourage private investment.
PAGE: WHAT ARE NEW DEVELOPMENTS IN KSE?
HAROON ASKARI: Karachi Stock Exchange is now a "DEMUTUALIZED" Exchange this means that the Exchange is now a "For Profit" company and it is a company limited by shares, constituted under Companies Ordinance. Just like any other commercial entity. Demutualization of the Exchange has many benefits one among these is the ability of the Exchange to chart its own development program without any interference from the Brokers.
KSE has embarked upon several new initiatives. Some of the important ones are as follows:
1. New Rules Book is being prepared for the Exchange that will govern all aspects of the Exchange including Trading, listing, Brokers' affairs and day to day running of the Exchange
2. Series of new products are in the pipeline, including Index Trading and Options
3. New programs have been initiated for investor education and investor protection.
4. Exchange structure is being changed to avoid conflict of interest by splitting the Exchange management in to two distinct section one to oversee the Regulatory aspect and the other is to look after commercial interest of the Exchange.
5. New initiative has been taken to improve the IT systems that will provide worldwide connectivity to market participants across all markets.
6. Centralized risk management system for all market and order information to all clients via SMS and e-mails to all clients on real-time basis.