Although the market had a tough year, foreign investment inflows rose considerably.

By Naween A. Mangi
Nov 16 - 22, 1996

The Karachi Stock Exchange released their annual report for 1996 early this past week. Posting a pre-tax profit (surplus) for the year of just Rs 11.42 million, down more than 46% from last year, and an after tax profit (surplus) of Rs 11.32 million, the recently re-elected President of the Karachi Stock Exchange, Arif Habib, described the year in his Presidential Review as "a period of turmoil and change."

"The political scenario has been marked by extreme tension. The structural weaknesses of the economy have been exposed and become all too apparent. The chronic budgetary deficit has led to a harsh budget. The huge balance of payment deficit and heavy servicing of foreign debts led to two devaluation," Habib said in his opening remarks.

In what has been a tough year for the economy as a whole and for the stock exchanges in particular, only the early part of the year was characterized by a strong bull run in which the KSE-100 index touched the 1850 level.

Following the federal budget for 1996-97, in which the government did not " offer the financial conditions necessary for the stabilization of the market," the market lost its momentum, Habib said. "The local institutions with large exposures to the equity market having been subjected to large portfolio losses were rapidly losing their ability to stabilize a falling market." In addition, the small household individual investor cut his losses and exited from the market. The index tumbled to 1350 points in September.

Looking at turnover, however, average daily turnover has risen from 14 million shares to 28 million shares, and turnover on the ready sector increased to 4.754 billion as compared to 2.225 billion shares last year; a rise of 114%. However, Habib expressed concern that the capital mobilized has decreased from Rs 30 billion to Rs 13 billion.

Habib went on to say that in order to restore investor confidence, both the Corporate Law Authority and the KSE stepped up on monitoring corporate behaviour. The performance of 17 modarabas was investigated, and show cause notices were issued to 184 companies with regard to default of which 143 were recommended to be placed on the defaulters counter. Eleven companies were later delisted in October 1995. The setting up of the Investors Protection Fund was also approved to protect investors interests in the event of default.

The directors report provides a review of the market during the year and they describe the movements in the index as "erratic, random and volatile." The year started with a 20% surge in the value of the KSE-100index to touch the highest point of 1855.22 on February 15, 10996, and later falling to close the first quarter at 1548.01 points. There was some recovery in the second quarter as the index rose 10% to 1703.28 points. . The third quarter proved more disastrous as the index fell to its low of 1332.14 on September 10. After an appeal, the government considered some remedial measures including guaranteeing the minimum purchase price for NIT units at Rs 13.70. The market then stabilized somewhat and the index stood at 1520.26 on November 7, 1996.

Market capitalization reflects a net appreciation of prices by over Rs 162 billion due to a net appreciation of prices by over Rs 162 billion and the 27 new listings. One debt instrument was also listed during the year and the number of listed companies increased to 791 companies, with a listed capital of Rs 192.662 billion with a market capitalization of Rs 473.461 billion. Of the 27 companies, 11 issues were over subscribed while 16 were undersubscribed.

What is perhaps striking is the foreign investment through the KSE in secondary market operations which rose in net inflow terms from Rs 242.312 million to Rs 2.286 billion in 1996. With the largest inflow in the month of May of Rs 1.2 billion total inflow during the year was a s high as Rs 2.62 billion and outflow was just under Rs 332 million. These figures for the corresponding period last year were Rs 1.059 billion inflow and Rs 817 million outflow.

The largest part of revenue came from listing fee, and other sources included trading fee, market data fee, regulatory fee, membership fee, and return on investments and short term deposits. Total revenue was just 2.4% up from last year at R s 69.3 million, and total expenditure was almost 25% higher at just under Rs 58 million.

Although the stock market revival package announced by the interim government has been widely appreciated, it did not seem to have any meaningful impact on the market itself. Yet, the package acceded to almost every demand the stock exchange chiefs made. It is clear that the performance of the market during 1997 will depend not only on the ability of the caretakers to take decisions to put our economic fundamentals back on track but on their ability to generate investor confidence as well.