THE STABILITY OF KSE 100 INDEX
AHMAD MAAZ SHAMAIL
Jan 29 - Feb 04, 2007
The performance of Karachi Stock Exchange, the apex stock market of the country, in 2006 proved many an analysts wrong. It has conclusively proved that the 'buy and hold' philosophy just doesn't always hold true.
What could explain the failure of such a big bunch of highly educated and informed professionals whose opinions influence thousands of ordinary stock market mortals? We live in an imperfect world, a statement sweeping as is, which is true in the case of Pakistani capital market that have only recently started to operate under globally recognized rules and regulations but having unique realities of its own.
To be fair, the 'buy and hold' philosophy does help keep cost of doing business minimal with lower taxes paid and saving on commission. But it may ultimately yield low profits because one may have to sell when the market is bearish or even if it is bullish the inflation, ever rising due primarily to food inflation, may eat up the profits.
The KSE 100-Share Index closed at 10,040 points on the last trading day of 2006, Friday 29 December, just 484 points above 9,556 points on the last trading day of 2005, Friday December 30. This marginal increase of just 5 per cent over 2005 was way lower to robust annual growth of 65 per cent2003 to 4,471 points, 39 per cent in 2004 to 6,218 points and 54 per cent to 9,556 points in 2005. The marginal growth made it easier for many companies to outperform the market in 2006.
Though KSE 100 Index did manage to touch the record high level of 12,273 points in April in 2006 the market failed to sustain the upward movement and the Index dipped to the lowest level of the year on June 15 at 8,766 points. From that point onwards the Index inched up slowly wiping out any gains it made earlier in December 2006- the first bearish December since 2002.
December 2006 would be remembered as the month of extremely low volumes, uncertainty, volatility, periods of range-bound movement, lack of direction. The last could singly be blamed for the directionless market. A total of just 60 billion shares were traded at the KSE up to December 27- the lowest since 2003: in 2005 it was 91.4 b shares; in 2004 it stood at 85.6 b shares and 76 b shares in 2003.
The average daily volume in 2006 declined substantially to 270.5 m shares, which once again is the lowest since 2003 with 308 m shares; 2004 with 343.7 m shares and 365.6 m shares in 2005.
The value of average daily turnover substantially decline by Rs 2 billion in 2006 over 2005- to Rs 31.6 b from Rs 33.6 b- after registering robust growth between 2003 and 2004- Rs 15.6 b and Rs 17.4 b respectively.
The market closed on a negative note amidst weak sentiments, discouraging low volumes and most of lack of interest despite attractive prices on the last trading day of 2006- Friday December 29.
Time is limitless and yet it is compartmentalized in hours, days, weeks, months and years to let us measure many things including accomplishments, performance, growth. It, in short, is a tool that allows us to measure progress over a certain period of time. And so, though in theory the advent of 2007 would not change a thing it, nevertheless, provides us a chance to do better over 2007 by giving us a base to start.
What direction the market would take in 2007? Would it be able to overcome the uncertainties arising from many unsolved issues inherited from 2006? Would the phased implementation of the risk management system at the country's biggest bourse, the Karachi Stock Exchange, would be able to win the stakeholders' confidence to bring the investors back ?back investors watching the market from the sidelines as was the case in December? Would the demutualization be completed on time as scheduled by December 2007? Would tax-related issues such as the Capital Value Tax, taxation on the dividend of companies income tax for listed companies be solved amicably for the satisfaction of government as well the stock market players?
And the biggest concern to the stability of the stock market would be the general elections and political uncertainties that come with it. Political uncertain negatively effect the performance of the capital markets and 2007 being an election year will be an important year indeed. Political stability, or lack of it, would thus play a crucial role for the stability of the KSE 100 Index this year.
The performance of the market in 2007 depends heavily on the confidence on how best the above questions are answered in theory and practice by the relevant decision makers.
If recent decisions are any indication the government is keen to keep the stock market stable. The government has already extended the exemption on capital gains tax for another year till June 2008 and the rally at the KSE the very next day the Prime Minister announced the one-year extension shows that the market did receive it positively.
The provincial government of Sindh has also extended levying the stamp duty on trading of shares for two years and that has also been received positively. For the seventh straight trading day ended Monday January 22 the market closed on a positive note adding around 700 points to the KSE 100 Index.
Prime Minister Shaukat Aziz also assured the stock market players at KSE's Top Company Awards ceremony on January 8 to resolve the remaining tax-related matters to the satisfaction of the influential community. Minister for State for Finance Omer Ayub Khan is reported to meet a delegation of KSE any time about the issue pertaining to the CVT.
The feelers sent out by the government have been positive and CVT, which was introduced by the government in 2004 at the rate of 0.1 per cent on purchase of shares and was subsequently lowered to 0.01 per cent later, was increased to 0.02 per cent (Rs 200 on Rs 1 million) in 2005. There is also a 0.005 per cent withholding tax imposed on sale of shares and there is also a brokerage commission on sale and purchase.
During the first quarter of current fiscal ended September 2006 the three stock exchanges, including the apex exchange the KSE, contributed Rs 425.7 million that depicted an increase of 131 per cent over Rs 182.6 million over the same period in the previous year. The collection of withholding tax from stock exchanges also increased from Rs 331 million to Rs 511 million during the comparable period under discussion. The stock exchanges thus contributed over Rs 936 million in CVT and withholding tax during the first quarter of the current fiscal that shows that government stand to collect a substantial revenue of a little less than Rs 4 billion in fiscal 07 ending June this year.
Before we look forward let us realise that 2006 was an eventful year for the Pakistani banking industry and year 2007 looks promising to be the more of the same. The year 2007 has begun with three major acquisitions in pipeline- PICIC Group by Temasek, the state investment agency of Singapore which owns and manages NIB Bank; Prime Bank by Dutch Banking giant ABN Amro and Crescent Commercial Bank by SAMBA Financial Group of Saudi Arabia. It is expected that banking sector would be witnessing more acquisitions and mergers in 2007.
The year 2006 was a watershed year for the Pakistani banking industry that witnessed foreign banking giants buying out a number of major financial entities. The interest of these foreign banking giants was fueled by record profits by the banking sector than paled profits made by any other sector of the economy. The first half of the year witnessed a major acquisition and a number of mergers- Union Bank was acquired by the Standard Chartered Bank while Habib A.G Zurich merged with Metropolitan Bank and First Allied Modaraba merged with Allied Bank Ltd. The second half of 2006 witnessed the merger of Rupali Bank with Arif Habib Rupali Bank and Atlas Investment Bank's into Atlas Bank.
The three major acquisitions in advanced stages include the purchase of 90 per cent of Prime Bank by Dutch banking giant ABN Amro, sale of majority shares of PICIC Commercial Bank by Singaporean state investment agency Temasek which already owns and manages NIB Bank, and acquisition of Crescent Commercial Bank by Saudi SAMBA Financial Group.
In addition, Shaukat Tarin, the former president of former Union Bank which was acquired by Standard Chartered Bank is also reported to takeover Mybank as 52.4 per cent shares held by business magnate Iqbal Ali Muhammad reportedly sold his shares at Rs 35 per share acquired about two years ago for Rs 18 per share.
It seems that the State Bank of Pakistan 's pro-big bank policy has been quite successful. The central bank raised the paid-up capital of banks and Development Finance Institutions (DFIs) from existing Rs2 billion to Rs6 billion and replaced the uniform requirement of capital adequacy ratio in October 2005. It raised the minimum requirement of paid-up capital for banks and DFIs in phases, by Rs one billion each year, from Rs 2 billion to Rs 6 billion by December 31, 2009 .
The central bank has also replaced the existing uniform requirement of capital adequacy ratio (CAR) with the variable CAR to be based on risk ratings of the banks determined by the SBP annually. The minimum required CAR for category 1 & 2 banks left unchanged at 8 per cent, banks in category 3 had to meet the CAR of 10 per cent, category 4 CAR of 12 per cent and Category 5 banks CAR of 14 per cent by Dec 31, 2006.
Acquisitions and mergers have let the foreign banks increase their influence and better their market share and with the majority small banks finding it hard time to increase their paid-up capital at par with the central bank's requirement the year 2007 will be a year of movers and shakers for the banking industry of Pakistan.
The banking sector, particularly commercial banking sector, has been in the forefront of the stock market growth over the last many years. The State Bank of Pakistan has been asking the banks to reduce their spread between lending and borrowing rates. However, the banking sector will still be on a roll this year continuing to make reduced but still substantial profits to keep supporting the stock markets to play a important role to keep KSE 100 Index stabalised.
Cement, fertiliser, energy, telecommunication, oil and gas exploration and oil and gas marketing sectors would also keep on supporting the market in 2007. Despite substantial surpluses due to expansion by cement manufacturers and tough competition from regional competitors for exports to Afghanistan foreign investors are interested to set-up cement plants in Pakistan . They are driven by the prospects of cement take-off when the government goes ahead with the construction of mega dams as promised and also by the increased construction activities the top being the development of Diamond Bar City on the two islands near Karachi . Cement stocks are a good buy for making a long term investment in the stock market.
Energy sector would also be a good bet given the shortage crisis that offer immense potential for stocks listed on national bourses. And one sector that the investors should be watched is the technology sector.
The sectors mentioned above would play a vital supportive role to keep the KSE 100 Index stabalised in the months to come.
THE CHALLENGES FOR THE KSE BOARD
The year 2006 was the year of many firsts at the KSE- the introduction of 30 Index and the beginning of the phased implementation of the Risk Management System on December 4, 2006 . The year 2006 was an eventful year for the KSE and the year 2007 is expected to be an even more eventful year.
The top two challenges for the KSE revolves round demutualization, which is already in its pre-implementation phase, and RMS- simply because without them the market would not be able to attract the local and foreign investment. We have constantly being hearing the talks about how to facilitate the growth in the size of the KSE from around $ 50 Billion at present to $ 100 Billion over the next five years, including a growth to $ 70 Billion this year.
Developing the derivative market also lists heavy on the agenda of the KSE. Enhancing the flow of foreign portfolio investment also lists high on the agenda. But here is the catch-22- Derivatives market could only be developed with demutualization.
Protecting the investors interests is another challenge. The SECP is already closely monitoring companies that announce but do not pay dividends and also companies that do not non-issue financial reports. Such practices should not be tolerated anymore and thus issuance of "dividend warrant" to such companies is more likely to be enforced this year.
One of the other major challenge would be the separation of settlement and trading risks to be dealt separately and not together as has been the practice.
The issue related to the absence of confidentiality and dissemination of information laws and their introduction should also list on the top priority of the KSE.