NO ROOM FOR COMPLACENCY

STOCK MARKET NEEDS ATTENTION OF POLICY PLANNERS AND REGULATORS

SHABBIR H.KAZMI
Aug 18 - 24, 2008

Stock market plays the crucial role of resource mobilization with the participation of millions of small investors. Market participants, and institutional investors play a major role but small investors and day traders have their own, which cannot be undermined at any stage. While the number of stock exchanges in Pakistan has remained confined to three, deployment of technology has enabled investors from every nook and corner to actively participate. Online trading facilities enable the investors to make their own decision and research reports prepared by the brokerage houses facilitate in making informed decision.

Peeping through the history spread over six decades shows many ups and downs but also reflects the overall trends of the economy and concern of the economic manager towards this important segment of capital market. If nineties is declared 'lost decade' it is also evident that the benchmark, KSE-100 index also touched its historic low. The index registered exceptional growth during the regime of ex-prime minister Shaukat Aziz only because he considered it the barometer of the strength of economy and took many measures to attract small investors. One of his biggest achievements was 'Privatization for People' program, aimed at passing on the benefits of privatization to general public. Under this program shares of state owned enterprises were offered to general public.

During 1950s the quantum of listed capital was just Rs 117.3 million and number of listed companies was 15 only. The number grew to over 487 by 1990 and listed capital exceeded Rs 28 billion. In year 2000 the number jumped to 762 and listed capital took a quantum jump to over Rs 236 billion with market capitalization of nearly Rs 383 billion.

Over the last eight years market has gone through massive consolidation due to change is regulatory frame work requiring more disclosure by the listed companies and proactive approach of the regulators. This included introduction of KATS, T+3 settlement, establishment of Central Depository, and National Clearing Company.

Deployment of technology has not only brought efficiency and transparency in the trading and settlement but also made transfers spontaneous. It is on record that lately single day trading volume exceeded one billion shares. Had there been not such an extensive use of technology settlement and transfer would have taken days.

Pakistan's market is predominantly equities based. Though, there has been a deliberate effort to increase the size of corporate bonds market, it has remained lackluster. This state of affairs could be attributed to a number of factors i.e. preference for borrowing from the financial institutions, reluctance in making adequate disclosure and fear of remaining on the watch list of credit rating agencies, else flotation of bonds helps in meeting specific term financing needs at a known cost. Another key factor for the slow growth of bonds market is failure in developing the secondary market.

Two sectors i.e. oil and gas exploration & production and telecom have had a major impact on the complexion and trading volume. Since these companies have huge listed capital they also enjoy large share in the daily trading volume and also the heavy weightage in the index. Therefore, these companies have the potential to set the market trend.

Some of the critics are of the opinion that the weightage should have been assigned on the basis of free float and not on the basis of listed capital. In case of companies like OGDC, PPL, PTCL the largest stake is held by the government and only a small percentage of total shares is held by the investors. Therefore, the free float of these companies is very small compared with the listed capital.

Around the world mutual funds play very important role in the formation of capital but Pakistani economic managers as well as the entrepreneurs have not realized their real potential. The growth in of this important sector has a very brief history.

Technically, open-end funds play a major role because there is the option of continuous sale and redemption but economic managers did not realize this. NIT, the first open-end fund was established in 1962 and remained the only open-end fund of the country for nearly 30 years. In the mean time many close-end funds were established, but all of these were in the public sector.

As the wave of liberalization, deregulation and privatization struck Pakistan also government allowed the private sector to establish open-end as well as close-end funds. Now the largest share in asset under management pertains to open-end funds.

However, NIT remains the biggest and one of the most efficient players, despite having largest percentage of its investment in equities. According to estimates assets being managed by mutual funds now exceed Rs 300 billion.

In terms of assets under management, mutual funds have investment in equities, fixed income instruments, diversified portfolio and the latest being Shariah compliant instruments.

Every stock market has its own bench marks for recording the performance. The Karachi Stock Exchange has three indices, All Companies index, KSE-100 index and KSE-30 index. However, KSE-100 index is considered the benchmark and KSE-30 index is establishing its own strength because bulk of the daily trading volume pertains of the companies included in this index.

At present equities market is experiencing the worst bearish spell. The index has slide down from its record high to present levels. While it is true that prevailing political situation does not permit investors to take long positions, but it is also true that inability of the regulators to read the bubble in making and take appropriate and timely measures has extended the bearish spell, now becoming a real concern.

In the development of capital market all the stakeholders will have to play their role and regulators have the biggest responsibility. Economic managers should also abstain from creating confusion. The economic fundamentals are still intact and prudent decision making can help in accelerating growth process, there is no room for complacency.