Stock markets have emerged as the single most attractive investment opportunity

Feb 28 - Mar 06, 2005



Investing in stocks was not commonplace in Pakistan, a largely agrarian society, until the 1980s when a raft of market-oriented economic reforms brought capital market exposure to the people. Then, throughout the decades of 1990s, the bourses kept attracting local as well as foreign investors because of a shift in economic policies in the direction of the three Ds (deregulation, decentralization and disinvestment).

But even so, market capitalization did not exceed $5 billion mark. Then came September 11, 2001, when the al Qaeda attacks World Trade Centre in the United States which forced Pakistan's government to withdraw its support for the Taliban regime in neighbouring Afghanistan and join the subsequent US-led war against terrorism.

The ensuing economic rewards to Pakistan not only allowed for new macroeconomic targets but also sent Pakistan's key stock index, the Karachi Stock Exchange's KSE-100, rocketing. At one point the market capitalization of more than 701 companies listed on the KSE reached a staggering $17 billion mark (about 26 percent of GDP) as the index kept climbing through 2002 and in the subsequent years. In 2002, the index rose by 112 percent, in dollar terms out-performing almost every other markets in the world.

The bulls outrage continued unabated until now. In the past two years, the market capitalization has reached at amazing $36 billion, roughly 38 percent of the national GDP.

When Pakistan prudently decided to side with the US in its war against terrorism in 2001, it thus became qualified for a liberal rescheduling of its multilateral loans, so averting default on its $38 billion foreign debt. The US also waived bilateral loans and the European Union extended additional quotas to Pakistani textile goods, the country's main export.

All this helped the economy grow by 5.1 percent in the fiscal year that ended on June 30, 2003, another 6.2 percent in the 2004 and now a stellar seven percent growth is very much visible. That provoked an investor stampede into the capital market. Stock markets have emerged as the single most attractive investment opportunity at a time of historically low interest rates of about 7 percent, as compared to over 20 percent just two years earlier. Money from overseas Pakistanis flooded in. Remittances rose by 77 percent to $4.2 billion in the year ending June 30, 2003, which still flowing in, although with somewhat slower pace. This all happened following a government's crackdown on illegal money transfers in an attempt to plug terrorist fundings. A large proportion of the remittances headed for the stock market as a stable rupee against the dollar and low interest rates left few other profitable options.



A high-profile privatisation plan that calls for partial disinvestment through stock exchanges also helped. The government plans to earn about $2 billion by the end of the current fiscal year through privatization of state-owned enterprises.

The results are phenomenon. The benchmark index of KSE-100 shares now hovering well over 8000 points and every day the index sees new highs. Analysts are now considering the 10,000 mark as the new resistance level.


The government is divesting its shares to general public, broadening the base of investors as well as the market capitalization. Moreover, the sale of strategic stakes in Pakistan State Oil, Pakistan Telecommunication, and banking companies respectively to corporate investors, is also on the card. Karachi Electric Supply Corporation, the sole electricity distributor in Karachi has also been sold.

The robust performance of Pakistani stock markets has, however, failed to attract foreign investors, who had quit the market in the 1990s. At that time, the highly volatile political climate of the regimes of former prime ministers Benazir Bhutto and Nawaz Sharif had led to grave corporate and economic uncertainty.

In the early 1990s, despite the stock markets tiny capitalization, foreign portfolio investment reached $2 billion. Ironically, now, when capitalization is in excess of $36 billion, foreign portfolio investment accounts for a paltry $100 million. 

The market is buzzed with the gossips nowadays of so-called foreign investment, especially from Middle East but insiders believe that this is the money of local brokerage houses being routed through Dubai. The past experience of foreign investors makes them disinclined to invest in Pakistani stocks, said Mohammad Sohail, director at Jahangir Siddiqui. "Despite a robust growth in the market capitalization, they have kept them away so far," he added.

Standard & Poor's and Moody's Investors Service recently upgraded Pakistan's sovereign-credit rating to B and B3 respectively but these are still way below investment grade. "(Another) four-to-five notch upgrading by the credit-rating agencies is required to convince foreign investors to come here," said Sohail.