INTERVIEW WITH NAZISH LUTFI, CHIEF EXECUTIVE ISMAR
May 28 - June 3, 2012
PAGE: TELL US SOMETHING ABOUT YOURSELF AND KSE.
LUTFI: I have a master's degree in economics from USA. I worked for more than 20 years at executive level for many world renowned organizations like Merrill Lynch, Lehman Brothers, Intercomex, and Bulls & Bears. With my associations with Reuters, I contributed expertise as a writer and researcher of daily market commentary on Forex, and equity and developed my own Lutfi magnet theory to simplify the understanding of technical analysis. My writing periodically was published in L.A times, Wall Street, Dawn, The News, and Pakistan & Gulf Economist. I also worked as consultant and corporate trainer to the leading brokerage houses, investment firms, banks, and mutual funds.
I have the mission and vision to develop professional market in Pakistan. I therefore came back to Pakistan and established institute of securities management and research (ISMAR) Financial in 2005, which is the only institute of its kind in Pakistan working for awareness of global financial market in the area of equity, commodity, Forex, and mutual funds by providing research, training, consultancy, and advisory services.
If we talk about Karachi stock exchange (KSE), there is a lot of potential in the market but unfortunately for the last 60 years the following factors have been hampering the growth of KSE.
1. Lack of professionalism in the affairs of KSE
2. Lack of financial education for the investors
3. Lack of investors' awareness
4. Low volume as new investors are very few
5. Low liquidity in the market
PAGE: YOUR VIEWS ON CORPORATIZATION, DEMUTUALIZATION & INTEGRATION ACT 2012.
LUTFI: The approval of the bill by the parliament and the signing by the President on May 7, 2012 the Stock Exchanges (Corporatization, Demutualization and Integration) Act 2012 put an end to decade of hassles. The process of law drafting started in 2002. The fact is that the demutualization in Pakistan has been delayed against the well established global trend where almost all stock exchanges worldwide operated in demutualized setup like India, Malaysia, Singapore, USA, UK, Germany, Hong Kong, Australia, Turkey. There is a general perception that stock exchanges are a kind of casino manipulated largely by a body of powerful brokers to enrich themselves at the cost of small investors who fail to understand the complexities involved in the fluctuation of the share market. This public view is largely supported as Pakistani exchanges in the mutualized structure is operating as non-profit companies where members had the ownership as well as trading rights. Such a structure creates conflict of interest as member predominately controls the affairs of the stock exchanges, which result in lack of transparencies in the operations of the stock exchanges and companies investor's interest. The Act has the potential to change the equation in favor of the capital market. This can only be possible if its provisions at different stages have to be completed within 119 days of promulgation of demutualization law and are honestly and faithfully adhered to.
PAGE: APART FROM DEMUTUALIZATION OF STOCK EXCHANGES TO MAKE CAPITAL MARKET VIBRANT, GOVERNMENT IS ALSO REVAMPING CAPITAL GAINS TAX REGIME WHEREBY CALCULATION AND DEDUCTION IS BEING CATEGORIZED AND AUTOMATED. COULD GIVE YOUR INPUT ABOUT IT?
LUTFI: In the present state of stock exchange where the liquidity is absent, any type of capital gains tax will further depress the market. The fact that demutualization is now effective, one should wait for demutualization which is expected to bring public and fund into stock exchanges. This will increase the confidence of the investor that results in improving the value of the share, which ultimately results in increasing the profitability of the companies and liquidity in stock market. Any tax at the stage of a liquid and booming share market will not only bring greater tax revenue to the government, but will also be acceptable to the investor.
PAGE: YOUR VIEWS ON FOREIGN INVESTORS IN KSE.
LUTFI: A demutualized exchange should be able to raise capital from different sources as normal for profit public limited company. An important source of capital would be the new shareholder, institutions, and individuals. This will open door to foreign investors in KSE.
However, foreign investors might not be inserted to invest because the valuation discount usually exists for several reasons:
1) The depth of the local currency market and the costs of swaps
2) The ownership structure and domestic structure of liquidity
3) Broad government and investment policy issues and uncertainty
PAGE: HOW WOULD YOU COMMENT ON IMPACT OF POLITICS ON CAPITAL MARKET?
LUTFI: The politics arises in the capital market when the right person with relevant experience and qualification is not placed at the key position in the capital market especially in regulatory bodies. The stock exchanges will be demutualized and the process has to be completed within 119 days with different assignments like appointment of legal advisor, audit firms, evaluators, and formation of board etc. Assignments have to be processed in transparent timely and honest manner in order to avoid politics during demutualization.
One of the major events, which can cause wild price changes in the capital market, is when a government decides to change the interest rate level to control inflation. A government will raise interest rates, if it believes inflation is on the rise. When interest rates go higher, investors tend to get out of high risk stocks and move into other less risky investments such as government stocks and treasuries. Other factors, which can cause stock market prices to fall sharply, are political unrest and wars. Initial reaction to such events is for stock prices to fall sometimes quite appreciably. However, as the unrest continues and once the initial shock is over, stocks start to recover. In addition, oil prices tend to rise whenever there is unrest or war and oil and stocks have a negative correlation, so rising oil prices due to political or social unrest usually signals falling stock prices especially those stocks denominated in dollars and energy stocks. Stable governments that have economic policies that promote growth and wealth have a positive affect on the stock markets particularly as a country moves out of recession into growth.