Dec 27, 2010 - Jan 2, 20

It may not be completely incorrect to say that the keen interest of foreign funds in Pakistan's equities market was the single largest factor that drove the market. Reviewing the highs and lows clearly indicates that at times interest of foreign fund managers provided the most needed support.

A closer look at the Karachi Stock Exchange indicates that over the last five years quantum of listed capital has increased to Rs915 billion from Rs519 billion, though the number of listed companies reduced to 645 from 652. Market capitalization having touched Rs4,330 billion in 2007, plunged to Rs1,859 billion, exceeded Rs3,039 billion by November end this year.

A heartening point is that listed companies enhanced their capital by more than Rs100 billion but only Rs33 billion came from listing of six new companies and the remaining came from issue of bonus and right shares. As against this, new flotation of debt instruments was rather slow. Having witnessed issue of seven debt instruments in 2008 amounting to Rs26,500 billion only four instruments were floated during 2010 amounting to Rs5,650 billion only.

Lately foreign investors have shown exceptional interest in Pakistani stocks, setting the market up for its second-best year for inflows in a decade, drawn by cheap valuations and some economic and security improvements. Such investments may be paying off as well because Karachi Stock Exchange is one of the few markets in Asia showing a rise for some time.

Pakistan remained one of the attractive markets in Asia as well as emerging markets with an improving domestic situation and a stabilising economy.

One of the most striking features was that up to June, daily traded volume was very high and in the second half it became too low. The highest traded volume on a day was close to 294 million shares and the lowest traded volume was just 9 million shares. The high and low levels could be termed 'real shocking'. However, one point is very clear that despite low volumes KSE-100 index continued its upward journey. After having plunged lowest of 9,230, the benchmark index also touched highest of 11,849 during the year.

Lower trading volume can be attributed to two factors: 1) imposition of capital gains tax in 2010-11 federal budget and 2) absence of leverage products. However, some of the analysts do not hold imposition of capital gains tax a factor responsible for keeping the volumes low. A positive point is that not bulk of the daily traded volume is settled contrary to a very low percentage of daily settlement in the past.

As regards leverage products, the opinions are quite opposite. Some of the analysts are deadly leverage products. They say that the beneficiaries of such products are daily traders mostly comprising of brokers fraternity and net worth investors. This certainly generates high volume, commission for the brokers and tax for the government but investment remains at lower ebb.

Unless real investors come to the market and investors' base is enlarged, market would remain in the grip of certain groups/individuals. It is believed that introduction of leverage product remains on the low priority of the regulators, else they would have finalised the details much earlier.

Whatever has happened is past, which can't be changed but peeping into 2011 is necessary. All the political parties believe and also support the notion that this government must be given a chance to complete its term. While the journey so far has remained rather bumpy not much hope can be attached. Some experts go to the extent of saying that friendly opposition is responsible for the prevailing mess. While it keeps on bickering, it is too afraid of making any move to bringing in-house change. The opposition knows well that it can't topple the government by initiating non-confidence move against the prime minister or impeaching the president. Even the Public Accounts Committee headed by leader of the opposition has proved toothless and spineless.


Many of the equities market say the KSE-100 Index has the potential to breach 15,000 level in 2011 but are not sure that for how long the level could be sustained. However, the consensus is that if political uncertainly abates, law and order situation improves, Pakistan-IMF relationship continues, and electricity and gas load shedding ends, not only investors confidence will improve but corporate earnings would also improve.

Energy, consumers, and banks are likely to lead the rally in 2011. Energy sector will continue to post decent return amid power shortages in the country, elimination of power subsidy and government's focus on developing this sector that has strong political implications also. Consumer demand in Pakistan is gradually improving due to rising middle class and urbanisation. Banks mainly due to stable net interest margins (NIMs) and lower provisioning will post better earnings in 2011.

Analysts recommend the investors should focus on mid cap stocks that are trading at steep discount and have good management with consumer linked businesses. After flat earnings for four years (2007-10) profit of listed companies is likely to post an average annual improvement of more than 10 per cent over the next three years. The growth will be led by energy and banks followed by cement and consumer sector.

Moreover, foreign participation in local market will remain robust next year due to ample liquidity in the global markets for high risk emerging and frontier countries. With Pakistan market trading at huge discount of more than 50 per cent to regional market against historical average discount of 30 per cent will compel offshore investors to focus more on Pakistan than other regional markets for better returns amid new phase of quantitative easing (QE2).

However, the real decisive factor will be government's decision to initiate privatisation program and offering of global depository receipts of selected companies in the global markets. It seems that the policy planners are still not sure whether it is the right time or not to approach the global markets.