Pakistan was declared the best performing market for
the year 2002. The KSE-100 index continued to move up during the first
two weeks of year 2003. Then came a sudden and un-ceremonial collapse.
The index lost nearly 350 points in just five days. At a time it was
hoped that investors base in Pakistan stock market seems to have started
rising, the recent episode has caused a breached of confidence. There
were many to claim the responsibility for the boom but is there anyone
to take the responsibility for the ongoing casualties?
Many analysts strongly believe that the recent fall
has nothing to do with fundamentals, technicals or liquidity. A crisis
likes situation arisen only because of the inability of the regulators,
both the KSE and the SECP, to read the emerging bubble. Even when the
bubble was about to burst, the KSE did not take corrective steps and the
SECP had to intervene. The SECP issued notices to 19 brokers for
violating the exposure limits. The step was taken to avoid any chances
of default that had become eminent.
One may appreciate the SECP move but it would have
been better if the Karachi Stock Exchange had taken the initiative. Some
analysts say, "It was a well-planned effort of some of the big
players to which the KSE management was a partner." This opinion is
based on the claim of KSE management that it was strictly monitoring the
brokers exposure limit on hourly basis. Whatever happened clearly
indicated that the claim was not only incorrect but the management was
helpless before the big players.
At a time when Pakistan's equities market were in
limelight and foreign fund managers, investors from the Middle East and
expatriates were keen to invest, the recent crisis has dampened the
sentiments. It strengthens the belief that there are many market
manipulators, some of the happenings in the recent past support the
view. It is a very strong belief that some big participants, having
control on Badla (Carry Over Trade) has the ability to move the market
in the direction they like at the expense of whole community of
Saying this much does not free the regulators from
discharging their due role. Rather, if they are aware that some of the
big players enjoy such a power it becomes all the more important for the
regulators to curb their power. About a fortnight back when the COT
volume achieved new highs and rate also touched high mark, the
regulators should have waken up. However, some analysts say,
"Either the regulators are hostage or lack the ability to
understand the emerging bubble." It may not be out of context to
mention that many analysts hinted towards the emerging bubble but the
regulators did pay any attention. This supports another common saying
about the regulators, "They only do the job of fire fighting but do
not take steps to stop fire breakout." Now the SECP is claiming
that its timely intervention has brought down the COT investment as well
as the COT rate. But the question still remains, why it did not
The general consensus is that despite the recent
crisis the KSE-100 index has the potential to continue its upward
movement. A lot has been written and talked about performance of
Pakistan's equities market. The overall consensus is that it has
outperformed all other markets. But the question re-emerges will it be
able to sustain this high level? Most of the analysts say that since the
rally has been driven by dividend yields and earnings potential, to a
large extent, investors' appetite will be high. Therefore, the
probability of further gains remains bright
Before dilating on the outlook of market for the year
2003, it is necessary to hear what some of the analysts say about the
new highs of KSE-100 index. They say, "The index over exaggerates
the reality. Truly speaking, it is still below 1,700 level."
Mohammed Sohail, Head of Research, Invest Capital, has written at length
on the subject in one of the previous issues of year 2002 of Pakistan
& Gulf Economist.
Prior to the upsurge of the market, if one can
recollect, many analysts were saying, "Most of the scrips are
selling below their fair value." They also pointed out that
investors were ignoring the 'incredibly attractive dividend yield as
well as the improved economic fundamentals in the post 9/11 era. The
flow of funds to equities market started mainly due to the declining
interest rates and the emerging 'surplus liquidity syndrome'. As long as
the funds continue to follow to Pakistan, particularly to the equities
market, the euphoria is expected to continue.
Are the dividend yields still attractive? The general
perception is that with the persistent rise in quoted prices of leading
scrips; dividend yields have started shrinking. However, many analysts
say, "Despite significant increase in prices of volume leaders as
well as other favourites, the dividend yields are still higher than what
an investors can earn from bank deposits or by investing in National
Savings Schemes. Keeping the savings as dollars has no incentive.
Besides, most of the real investors are not looking for one time gain.
They look for regular and quantifiable future income. Therefore,
investors' interest in dividend paying companies is natural."
Will the recent crisis distract the real investors?
As stated earlier, the recent rally was driven by dividend yield and
earning potential. Therefore, the outlook for the equities market is
directly dependent on economic fundamental for the corporates. Most of
the macroeconomic indicators have improved substantially over the last
three years. These include foreign exchange reserves, tax collection,
budget deficit, GDP growth rate and debt servicing as a percentage of
GDP, trade deficit and the rate of inflation. Therefore, the corporate
earnings are expected to remain robust. The higher GDP growth,
particularly led by the agriculture, improves purchasing power and leads
to higher spending.
Investors also ask a question, be it true that even
in the post 9/11 era the earnings of leading scrips were hardly
effected? The overall consensus is that the earnings of leading scrips
were least effected. Since their revenue was driven from domestic sales,
they mostly benefited from robust demand. The demand remained robust
mainly due to low inflation rate and higher disposable income. The lower
inflation rate was an outcome of strong rupee that contained cost pushed
It was evident that the equities market did not
responded to the various internal and external shocks the way it had
responded in the past. Therefore, while there was a global downturn,
Pakistan equities market emerged stronger. It was rather unique that
this time the investors based their decision on dividend payouts and
earnings potential. They have benefited largely by following this
strategy and also regret why they could not make prudent decisions in
It is necessary to acknowledge the efforts of various
brokerage houses that have been producing intensive and extensive
research reports. Similar reports were produced in nineties but their
circulation was limited, mostly to the clients. Now the summary or at
least excerpts of these reports are regularly printed in newspapers and
magazines. Pakistan & Gulf Economist can rightly take pride
in being the pioneer in publishing weekly reports from Khadim Ali Shah
Bukhari & Company and some other brokerage houses.
Normally the investors look at the dividend payout
history of the corporate. However, the credible dividend payment record
alone cannot guarantee future dividend payment. Therefore, one should
not base his/her investment decision purely on dividend payout history.
Along with the payout history, a prudent investor should also look at
future earnings forecast and economic fundamentals enjoyed by the
company as well as the sector. It may be said that generally those
companies, which have credible payout record, also take pride in
maintaining dividend payout level.
There are visible signs of revival of the economy and
improved capacity utilization in various industries. A number of
industrial units have started undertaking BMR and expansion programmes
that are aimed at achieving higher value-addition and quality standards.
These steps brighten the prospects for improved future earnings.
However, to ensure sustained earnings the GoP must take certain
According to a head of research of a leading
brokerage, "The country needs some basic changes in the tax
structure. So far the capital market players have been demanding that
capital gains must remain tax exempt. This is a bad policy and only
proliferates speculation. If the government is serious in greater
participation of small investors than dividend income should be declared
tax exempt and capital gains should be taxed. The corporates and their
employees are the largest contributor of direct as well as indirect
taxes. Therefore, the amount paid as dividend should not be taxed."
In the past, non-compliance to corporate governance
and insufficient disclosure enabled the listed companies to skip
dividend payment. Since Khalid Mirza took over as Chairman of Securities
and Exchange Commission of Pakistan (SECP), various structural reformed
have been introduced. The general consensus is that regulatory framework
as well its compliance has improved substantially. However, some critics
do not agree with this. They say, "Unless the number of
shareholders in listed companies increases, all these efforts remain
fruitless and futile."
With the hike in quoted prices of leading scrips,
investors have started looking at and even buying second and third tier
scrips that is not a good sign. If one can recall Altaf Saleem, the
previous Minister for Privatization was of the view that off-loading of
shares of state-owned enterprises should correspond to the market
appetite. The successful sale of shares of National Bank of Pakistan has
proved his point.
It is more or less evident that privatization process
of state-owned enterprises like Pakistan Telecommunication Company,
Pakistan State Oil Company, Habib Bank, United Bank, Pakistan Petroleum
is not moving at the desired level. There is also resistance against
sale of entities of strategic importance to foreign investors. Most of
these enterprises are earning handsome profit. Therefore, the benefit of
privatization of these entities must go to local investors.
It is believed that Privatization Commission is also
actively considering the divestment of GoP holding in public sector
enterprises through stock exchanges after the successful experience of
National Bank of Pakistan. The GoP must also, as a rule, make listing of
commercial banks mandatory on local stock exchanges. Privatized banks
like Allied Bank of Pakistan, Bank Alfalah and United Bank must be
listed on local stock exchanges without any further delay. Following
this policy will increase the market float of good corporates and lessen
the running after a few scrips. The advantage of this will be less
vulnerability of the prices of volume leaders.
In order to increase the market float further, the
SECP must make two announcements immediately: 1)
fixing the minimum paid-up capital requirement at Rs 100 million for all
the listed companies and 2)
stipulating that sponsors cannot hold more than 51% shares of the
company directly or indirectly. The two proposed steps will help in
weeding out the companies that do not abide by the various listing
regulations, i.e. companies resisting getting 'live' on CDS, timely
announcement of financial results and holding Annual General Meetings.
It is important to discuss resistance against getting
live on CDS. One group of corporates was pleading that they have small
capital base and have hardly any turnover of shares and find no
justification in getting live. The other group, comprising of textile
companies, even went one step further by challenging the move in the
court of law. The court decided that the SECP, being the regulator of
corporates, has the authority to resolve the issue. However, it is
regretted that despite the court order, the SECP failed to implement its
own rules. Analysts are right in demanding that if the listing
regulations stipulate getting live mandatory, why the SECP has been
condoning the violation?
The various crises, including the latest one, clearly
establish the inability of the regulators, both the KSE and the SECP, to
oversee the market effectively and efficiently. As regards the latest
crisis, if it had happened at all, the heads of the Securities and
Exchange Commission and the Stock Exchange would have tendered their
resignations. If the Chairman of SECP and the Managing Director of
Karachi Stock Exchange, despite their gross negligence, do not have the
courage to tender their resignation, must apologise publicly, at least.
KARACHI STOCK EXCHANGE
In the post 9/11 era Pakistan's equities market has
virtually outperformed all other markets. The year 2002 started with
KSE-100 index at a very low level of 1,273 points. At the end of year
2002 the KSE-100 touched new highs and created new records of daily
turnover. The KSE-100 behaviour, despite many external and internal
shocks, was contradictory to its historical reaction to such shocks. The
positive point is that the local retail and institutional investors have
driven the rally. Participation of foreign fund managers was either
absent or at the lowest level.
Though, a number of listed companies opted for
voluntary de-listing, four new companies were listed having an aggregate
paid-up capital of over Rs 6.3 billion. The most remarkable feature was
that 15 new Term Finance Certificates (TFCs) were listed having an
aggregate value touching Rs 8 billion up to November 30, 2002. The total
addition to listed paid-up capital was about Rs 65.5 billion during year
2002 as compared to an addition of Rs 14.7 billion for the previous
CENTRAL DEPOSITORY COMPANY
The Central Depository Company of Pakistan Limited (CDC)
has completed five years of its operations on September 3, 2002.
According to Mohammad Hanif Jakhura, Chief Executive Officer, CDC,
"Over the years the depository has been providing state-of-the-art
settlement system. This has tremendously helped in promoting efficiency
and transparency in the capital market." The National Clearing and
Settlement System (NCSS) was launched on December 24, 2001 and the
number of securities trades at NCSS is being gradually increased. The
CDC also has a comprehensive arrangement with NCSS.
The CDC continues to diversify its operations by
adding more features and functionalities, which are synergetic to its
core activity. During the year 2001 the CDC handled the first electronic
de-merger of ICI Pakistan into two entities. As a result of this
de-merger, more than 200 million shares were cancelled and about 90
million shares were issued electronically. The de-merger of this
magnitude in a physical environment would have been extremely tedious,
time consuming, costly and error prone. This was a welcome change for
the shareholders as they were freed from tedious and manual procedures
and time delays without any additional cost.
Another business feature added to its fold is the
trusteeship of open-end mutual funds from March 1, 2002. Currently CDC
is the trustee of three open-end mutual funds. These are: Pakistan Stock
Market Fund, Pakistan Income Fund and United Money Market Fund. The
reliability and cost efficiency are the two ingredients, which are
expected to bring more sponsors to CDC.
The CDC launched Investor Account service from
Karachi in 1999 that was also extended to Lahore and Islamabad. It has
earned popularity among the investing public. Currently, CDC has about
7,000 investor accounts having more than 1.2 billion securities. As on
September 30, 2002 the listed capital at KSE was over Rs 274.6 billion
with market capitalization of approximately Rs 463.6 billion. Market
capitalization of securities at CDS exceeded Rs 133.8 billion.
According to Hanif, "The implementation of T+3
settlement system has resulted in increased settlement volume. Despite a
20% reduction in transaction fee effective November 2001, the
transaction revenue surged by 50% from Rs 71 million in year 2000-01 to
Rs 106 million in year 2001-02. This had a positive impact on after tax
profit of the depository."