As the KSE-100 index is creating new highs, investors
are a little skeptical about its future movement. While many analysts
strongly believe that the index has the potential to sustain its upward
movement in the longer term, it may experience some surges as technical
correction has become over due. Some analysts believe that index may
cross 3,000 before the current financial year ends. However, they also
say that the future movement of the index depends a lot on the GoP
policies political stability in the country and geopolitical conditions
in the region.
All the economic fundamentals driving the economy are
very encouraging and hints towards a more than 6% GDP growth. In the
recent past the country was suffering from three contentious problems
— low investment, inadequate value addition and poor capacity
utilization. The data indicates that with the improved purchasing power,
domestic demand has increased. To meet the increased domestic demand and
to cater export markets, large-scale fresh investment has been made for
BMR and creation of new production facilities — also helping in
achieving higher value addition. All these factors contribute towards
improved earnings of corporate sector.
With the increase in quoted prices of shares dividend
yield has come down but quality scrips still offer higher return as
compared to the return being available from investments. Corporate
earnings are expected to improve further due to lower interest rates,
virtually no cost-pushed inflation and better capacity utilization.
Saying this one must not ignore that with improved corporate earnings,
they are also expected to pay higher dividends. Therefore, the impact of
share prices increase on dividend yield will be diluted.
Price is factor of demand and supply. Many analysts
believe that with the increased flow of fund to equities market, the
supply is not sufficient to meet the growing appetite. The situation is
due to very low free float and presence of small capital-base companies.
Most of the high yielding scrips are highly illiquid, mainly due to
tight holding of sponsors as well as the existing shareholders.
Therefore, there is dire need to increase the free float.
A large number of profit-making state-owned
enterprises are not listed at stock exchanges. The GoP has announced to
enlist such entities on stock exchanges. Listing of these enterprises
and sale part of GoP holding through stock exchanges can help in
achieving the twin objectives, increasing the free float and mobilizing
funds. The added advantage would be that GoP would retain the management
control of these entities till it finds a suitable strategic buyer —
also willing to offer the desired price.
It is necessary to reiterate a GoP policy
announcement — listing of all the commercial banks incorporated in
Pakistan on stock exchanges and offer of a specified percentage of total
paid-up capital to general public. Two of the largest commercial banks,
United Bank Habib Bank, and Allied Bank of Pakistan are still not
listed. A privatized bank, Bank Alfalah, is also not listed. All these
banks must be listed on stock exchanges without further delay in
compliance with the GoP policy.
It is also suggested that more shares of already
listed and profit-making state-owned enterprises should also divested
through stock exchanges. For example, only 12.5% shares of Pakistan
Telecommunication Company (PTCL) have been off loaded. The scrip enjoys
demand and also offers around 20% dividend per annum. It is necessary to
reiterate that Altaf M. Saleem the previous Minister for Privatization
had said repeatedly that sale of GoP owned shares would be sold,
depending on the market appetite. Since the appetite is there, what is
holding the GoP to implement its declared policy? As such the local
investors have the preemptive right to buy the shares of public sector
Since more investment is flowing to the equities
market, it is imperative on regulators to ensure maximum disclosure and
compliance of code of corporate governance by the corporates. At the
same time activities of brokers should also be monitored to avoid any
crisis due to overexposure and indulgence in insiders trading. Stock
exchanges should also become a little more stringent regarding
compliance of listing regulations to protect the interest of small
shareholders, the real driving force of a vibrant equities market.
Last but not the least, investors should not base
their investment decisions purely on dividend yield. They should also
look at the cashflow statement. A company posting millions of rupees
profit may not have sufficient funds to pay even nominal dividend. If
they not have the expertise to evaluate the numbers given in balance
sheet and profit and loss statement, they must consult a reputable
brokerage house. Many brokerage houses prepare extensive and intensive
reports, which are also available at their websites.