KSE: WHAT WILL BE THE DIRECTION?
A lot depends on the GoP policies, political and regional stability
By SHABBIR H. KAZMI
June 02 - 08, 2003
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 enterprises.
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.