NEEDS TO HELP CAPITAL MARKET GAIN UPTICK

MULAZIM ALI KHOKHAR
May 11 - 17, 2009

The finance ministry is confident about stock market outlook as the market is recovering from heavy losses of more than 50%. The recent review by the ministry has highlighted the recent monetary policy improvement and political calmness as good signs for the future of the market.

The ministry's statement precisely defined market hike during 1H-FY09, and added the market again started discounting amid increasing military adventures and worsening law and order condition across the country especially in Karachi, the business hub of Pakistan. As evident from the table, we recovered 20.6% since the start of recovery period during early 2009 months, but the recovery has slowed down for the last two months and since March 2009 returns have slowed to 5%.

A STORY OF STOCK MARKET AND THE RESILIENCE OF THE BOURSES

The great pain of the worsening security and political situations was felt by stock market investors as the KSE 100 index plunged by 58% approximately during the year from its previous peak. 2008 proved to be the worst year since 1991 for the bourses and the market touched 4 year low at lower than 6000 on the index during last day of the year 2008.

The capital market size (the market capitalization) in the economy which stood at 49% of GDP has then declined to 14% of GDP. Market Capitalization as of 31st December 2008 stood at US$23.5 billion as against US$75 billion on 18th April 2008.

The average daily volumes traded in the market have fell about 45%-50% during the end of 2008 as compared to average daily volumes at the beginning of the year.

Investors became shaky and the major reason of their reluctance in the investments was 3 and a half months long floor on account of economic instability, and foreign investment outflow on account of security concerns in the country. Market lost approximately 35% before the floor and it lost another 36% in only 12 trading sessions after the lifting of the floor. The floor mechanism created an extra pressure and concern in the minds of investors, which restricted the price discovery and at last crushed the market badly.

The floor mechanism put a halt on the mutual fund investment. The most of the stock fund seized their redemption amid liquidity problems. Investors wanted their money out of the fund while the fund being stuck in the market could not redeem the investors' money. These sorts of activities broke investors' confidence on the fund managers.

The Government then came forward and helped the CFS financiers by purchasing from them the financed stocks at 12.5% discounted values as on 24th December 2008. It somewhat helped financiers, most of them mutual funds, to minimize their losses.

The Rs. 20 billion fund launched during early 2009 helped the market notice uptick that brought the investors' confidence on the track.

Foreign investors have been reluctant to come back in Pakistan's capital markets. But the shock is now seemed to be absorbed by local bourses as the market is getting pace slowly and gradually. The investment now in the market is total real, as CFS (Continuous Financing System) is barred. The people, fund managers and other institutions are keen to invest as the market still is offering attractive prices.

As the economic outlook improves and we get more foreign aid, as promised, it will bring momentum and overall money flow and the more developmental expenditure will turn in higher economic growth. This system may take a year or two to get into effect after we get the desired economic assistance.

OTHER REGIONAL MARKETS

COUNTRIES

CHANGE SINCE
MARCH 31, 2009

2009 YTD

Indonesia

38.80%

43.80%

Taiwan

28.60%

41.50%

India

26.10%

21.50%

Korea

24.50%

22.30%

Thailand

23.10%

14.80%

Malaysia

21.20%

14.40%

Philippines

12.50%

17.00%

China

9.40%

42.50%

Pakistan

4.90%

20.60%

The most of the Asian stocks have posted gains average above 25% and in the range of 10% to 40%. Indonesian market has picked a very thrilling growth pace with 39% profits since March-09 and has recovered 44% of the market losses made during the last year.

The Karachi bourses after outperforming regional markets in 1Q-09 have put their feet on breaks and profits have almost halted at 4.9%. The KSE 100 index fell 11% during the last two weeks amid growing militancy and accompanying military actions in Swat and the entire Malakand division.

The corporate earnings are getting healthy and the 1Q results were simply outstanding in the stressful economic condition. Analysts are very confident that it will recover very soon.

KEY MSCI INDICES

Indices

  March 31, 2009
Change since
2009 YTD
MSCI _EM 24.90% 25.60%
Asia Pacific 24.80% 25.10%
MSCI _EM _Asia 24.20% 25.60%
Asia Pacific Ex Japan 22.20% 21.20%
Asia ex Japan 17.00% 3.90%
MSCI _World 16.50% 5.30%
Source: MSCI, *As of May 06, 2009

Global stock markets are not exception in terms of regional and local growth in capital market. The overall capital markets are gaining health due to easing concern of global recession, improved liquidity conditions and reduced risks for the investors.

These markets have also been impressive but not as impressive as the Asian's and other regional markets. The MSCI_EM has been strong and has climbed 25% of the lost mountain index graph. MSCI_World has been low comparatively but 16.5% recovery is not a bad deal at all.

HOPE FOR THE BEST BUT BEFORE THAT

Everyone in the market has to play its role. Financial Institutions, corporate entities, individual, brokerage houses and market giants need to make informed decision and play positive part. Market is strong at fundamentals which may be confirmed by the quarterly results recently announced. Most of the companies are still earning profits and paying decent dividends.

The markets are now at their lowest PEs and very attractive price. Government and the long term investor like big brokerage houses and mutual fund should come forward to help the market achieve its fair price discovery and lost acceleration in values.

To attract more foreign investments the government needs to address the worsening law and order conditions more efficiently. It is really very hard to attract foreign inflows in such a crisis like situation, but the government needs to promptly address the issues.

Power shortage and liquidity problems, being the main cause of industrial collapse (like textile), need to be put to rest as soon as possible.

The power, chemicals and fertilizer sectors and financial sectors are presenting very attractive values at this time. The government can attract foreign direct investment in these and many sectors by fulfilling their basic demands and ensuring certain future prospects.