INTERVIEW: MD KSE

'RESTORING INVESTORS' CONFIDENCE ON TOP OF AGENDA'

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

May 2 - 15, 20
11

Nadeem Naqvi has recently taken over the charge of Managing Director, Karachi Stock Exchange, the largest bourse of Pakistan. Pakistan & Gulf Economist talked to him to explore how he sees the market and what are his plans to make Pakistan one of the best performing markets once again. Following are the key points from this exclusive interview.

PAGE: WHAT IS THE ROLE OF STOCK EXCHANGES IN THE CAPITAL FORMATIONS?

NAQVI: This may look too basic a question but understanding the role of bourses in long term capital formation helps in developing policies, monitoring and preempting development of any bubble before its bursts. Since there is a constant sale and purchase of shares and debt instruments, providing an efficient trading platform and level playing field to all the investors, irrespective of how big or small, is the primary responsibility of the bourses. Enhancing daily trading volume depends on the depth, breadth, and market sophistication and of course, the overall macroeconomic, political, law and order and geopolitical conditions.

PAGE: WHAT ARE THE MAIN HURDLES IN HANDLING THE AFFAIRS NOWADAYS?

NAQVI: The biggest challenge for me as well as the brokers' fraternity and the apex regulators is to ensure good governance, transparency and fair play without disturbing the way business is done in the market. In the foreseeable future the exchanges will have to primarily focus on managing systemic risks and improving the ability to preempt any crisis before it happens. This new emphasis in the role of the exchanges requires building capacity to attract new capital issues and help the securities industry broaden the investors' base by rolling out new products (including debt instruments) to increase daily trading volume. For this, they will have to undertake large scale awareness generation/marketing campaigns for the potential investors, especially retail investors on one hand, and attracting quality companies look for capital to list on exchanges, on the other hand.

PAGE: WILL YOU BE ABLE TO RESTORE THE INVESTORS' CONFIDENCE IN THE BOURSES?

NAQVI: I am nobody and the role of MD does not bestow any magical powers. The crisis of confidence can be tackled through joint efforts of the three bourses (KSE, LSE, and ISE). My message to my friends in the brokerage community is to put our houses in order, in terms of governance, practices and ethics so that we can stand up and tell the investing world that we have the will and the capacity for self regulation. We have to develop the integrity and courage to take the erring elements to the task and protecting investors' interest, even before the apex regulator SECP has to come into the picture. Once the exchanges demonstrate that they can do the job and ensure fairness and equality for all the investors, I have faith that investors' confidence will be restored. There is ample surplus liquidity in the economy and as confidence is restored, some of this will flow into stock exchanges, where long-term returns are significantly higher than other financial instruments.

PAGE: IT SEEMS THAT FOREIGN INVESTORS HAVE BECOME THE INVESTMENT POWERHOUSE.

NAQVI: Over the last one decade, it has been observed that the profile of investors in Pakistan market has changed, but this is not unique as it is part of the global phenomenon. Between 2000 and 2010, interest of foreign portfolio fund investors in emerging markets has grown at an astronomical rate; the reason being that the developed economies were growing at much slower rate as compared to the developing economies. The rate of return in the developed economies was also relatively low as compared to the emerging markets. On top of this, the developed economies have been facing an increasing aging population whose reliance on pension is rising rapidly. The simple fact is that they face rising liabilities while the return on pension assets is below the return needed to fund these liabilities. They are seeking new avenues offering higher return, which are mostly available in the emerging economies and alternative asset classes.

INSTITUTIONAL VERSUS RETAIL INVESTORS

Added to this there has been the prolonged lagging performance of developed markets allowing foreign investors to become and remain an integral part of the emerging markets, including Pakistan. Despite Pakistan's macro indicators not being very attractive at present, I believe over the longer term foreign investors will remain a significant part of the investors mix, certainly with cyclical inflows and outflows. On the domestic side, the growth of mutual funds over the years has increased the importance of domestic institutional investors, as retail investors seem to be channeling their investment through mutual funds. This trend is also likely to continue going forward.

PAGE: WHAT IS A MAJOR THING THAT HAS HURT THE INVESTORS' SENTIMENTS MOST?

NAQVI: The 2008 crisis and especially the prolonged closure of the market have hurt retail investors the most as they did not have holding power. It will take some time to bring them back, especially when the country faces fragile economy along with high unemployment rate and declining real incomes due to high inflation rate in the country. The retail investors may develop the capacity to put part of their saving into the equities market, especially when they are able to save. Till local retail investors come back foreign investors will continue to drive the market in the near term, but I am sure soon local investors will come back to the market, particularly as the commodity cycle peaks and equities begin to shine again especially given attractive valuations at present.

BRINGING BACK RETAIL INVESTORS

Hoping that soon Pakistan market will cross the pre-crisis level of 2008 may seem a dream but concerted efforts and taking corrective measures can help the market to slowly and gradually consolidate and keep its slow march towards new highs. This requires a lot of hard work by all the stakeholders, the government, the apex and front line regulators, institutional investors and above all, giving retail investors the confidence that no one can cheat them.

PAGE: DO YOU HAVE ANY SPECIAL PLAN TO DEAL WITH THE SITUATION?

NAQVI: Give me some time to get my hand on the pulse of the market, listen to what the market participants say and what are the grievances of the investing community. I am sure brokers' fraternity as well as investors are keen in making Pakistan one of the best performing markets, they have done this in the past and can do it again. However, to achieve this all the stakeholders will have to arrive at consensus on a road map, develop supporting policies, and give the investors the confidence that their investment is secure.