Manager Research

July 30 - Aug 05, 2007

Talking about avenues of investment, what better can it be then the booming equity market of Pakistan. End of the last fiscal year FY07 marked the sixth consecutive year where by the KSE-100 Index registered an outstanding growth of 31% on a year on year basis. The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth, a successful privatization process, sound monetary policy of the SBP, maintenance of fiscal discipline and the capital market reforms including development measures introduced and adopted by the stock exchanges with full support and guidance of the apex regulator, SECP. Apart from that previous performance of the market were followed by a humungous decline however this time round foreign investors supported the market well and maintained its stability and constant growth trend. Special Convertible Rupee Account at the end of the year closed at US$977m while during the last year it was US$350m. The historical (FY01-FY06) compound annual growth rate since FY01 stood at 47%. The gain of 31% in the outgoing fiscal year FY07 was lower than previous 5-year (FY02-05) average of 50% but significantly above last 10-year (FY97-06) average gain of 25%. Market yielded better return in the second half of the fiscal year (Jan-Jun) versus that of the first half (July-Dec). The major thrust came in the fourth quarter whereby the index surged by 22%. Market Capitalization on the other hand grew ahead of the growth in the index at a remarkable CAGR of 51%. Average daily volume of 321m shares in FY06 were far more then the trading volume of ready counter in FY07 which reduced to 211m shares. Similarly, volumes in futures market also declined to 59m shares in FY07 as against 103m shares average daily turnover a year earlier.


Insurance sector was one of the star performers, showing a huge 125% growth in FY07. The main reasons behind the extraordinary growth were the increase in over all economic activities along with foreign interest in major insurance companies' shares. Due to higher spreads, banking sector yet again posted an extraordinary growth in its profits in FY07. Similarly, merger & acquisitions and foreign buying kept this sector in the limelight as well. The overall banking sector gained 113% in FY07. Fertilizer sector also performed well in FY07, owing to diversification in the companies' operations and increase in DAP prices during the year. E&P sector underperformed the KSE-100 Index in FY07, posting a return of -4.4% as compared to 38% for KSE-100 index. This under performance was mainly due to lower than expected production and stable to declining international oil prices.


The performance of the stock market was not as good when compared with other Asian Emerging Markets. KSE, in FY07 was below than the major Asian Emerging Markets. In FY07, Pakistan market underperformed both MSCI EM (43% return) and MSCI EM Asia (41%). Shanghai Composite of China rose by 129% followed by Indonesia's Jakarta Composite with a growth of 63%. KLSE Composite of Malaysia rose by 48% to close at 1354. Whereas Strait Times of Singapore and BSE-30 rose by 46% and 38% respectively. Nikkei was the worst performer amongst the market as it rose by mere 17%.


In 2001, KSE-100 witnessed a decline of 16% mainly because of terrorist attacks that rocked the USA. The 9/11 attack removed the gains of the bourses. Average daily volumes during the year were 82m while average value traded was Rs.2.4 billion. In 2002, the index staged a huge recovery rising by 112% during the year despite Indo-Pak crisis during the month of May 2002. First a suicide bomb blast on 8th May in Karachi (the first of its kind at that time) that resulted in the loss of several lives and then the tension on the Indo-Pak border. In 2003, it was declared as the "Best Performing Stock Market of the World for the year 2002. The start of the 2003 was not much promising as In January 2003 the leverage in the market had gone out of control and COT / badla rates had to be officially capped at a massive 40%. Even though after such dismal start, KSE-100 managed to post a rise of 66% with average value traded during the year jumping by more than 150%. The year 2004 might be a rare exception in KSE recent history when there was no crisis of any sorts. However, the year was also generally a lull in terms of the rise the market had become used to. There was little activity for a larger part of the year and even though the index might have risen by a healthy 39% during the year, 11.67% of this rise was in the month of December 2004 alone. 2005, who can forget March 2005? Again a crisis caused by excessive speculation, very frequent change of rules pertaining to exposure requirements and curtailment of funding channels for stock trade. The number of companies eligible for COT was being reduced gradually, while margin financing hadn't taken off. This switched most of the leveraged trade to the futures" counters. This increased the 'hedging' opportunities between the ready and futures" market (buying on ready counter and selling on the futures"). Infact hedging increased to such a level that it soon became apparent that the 'hedged' position and other leverage had collectively risen to such levels that there was a settlement risk for the entire stock exchange. When the bubble finally burst, the market fell by almost 25% in the last two days of March 2005. Later on corrective measures were adopted by the management of the bourses which resulted in the year end index return of 54%. The average value traded during the year jumped by 100% to Rs.34 billion.


The main highlight of the year was a quantum jump in the foreign inflows into the local market. Last year the net inflow was US$356mn while this year Pakistan's equity market attracted US$2.5bn worth foreign buying during FY07. These inflows were inclusive of the 3 successful GDR issues (OGDC, MCB & UBL) worth US$1.5bn. Resultantly, this has improved the float adjusted market cap of Pakistan market from 20% in FY06 to 26% by the end of FY07. On the other hand, foreign ownership in the float adjusted market cap has also increased to 30%. Besides rising foreign ownership (offshore funds usually take long positions), higher mutual fund and institutional buying and easy availability of funds were the other factors behind improved delivery base buying.


The performance of the mutual funds industry has generally kept pace with the performance of the stock market. During the past 3-4 years, the stock market in Pakistan have performed well and if they continue to perform better and attract investment more and more corporate and small investors would venture into the business, which is also a precursor for better future prospects of mutual funds industry in Pakistan. The growth in the mutual fund industry continued in the year FY07 (July 2006 - March 2007), where in total seventeen funds were launched/listed out of which 14 were open end and 3 were closed end. Amongst the open end fund four were Islamic Funds. During the year, Pakistan made its first portfolio investment abroad by launching the Pakistan International Element Islamic Fund.


During the year many GDR issues were made by the government. Following the overwhelming response of MCB GDR, government of Pakistan held the GDR issue of OGDCL. Earlier Government of Pakistan disinvested part of its shareholding in the company in November 2003. The offer was the largest ever equity offering of a Pakistani company abroad. Government of Pakistan along with Privatization Commission has planned IPO of Habib Bank Limited (HBL) and GDRs of United Bank Limited (UBL), National Bank of Pakistan (NBP) and Kot Addu Power Company (KAPCO) and later HBL will also be offered with proper sequencing during the next few months and efforts would be made to complete the same by the end of the current fiscal year.


KSE-100 managed to post a gain of 31% y-o-yin FY07 and the same is going to continue as the equity market of Pakistan still trades at lower multiples when compared with the regional markets. Continuation of the present policies on banking sector by the SBP, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains, and presence of institutional investors in the market and expectation of high corporate earnings are to provide impetus to the market growth in the future.