KSE BENCHMARK INDEX ON THE RISE
SHABBIR H. KAZMI
May 28 - June 3, 2012
Beginning 2012, benchmark KSE-100 is on the rise, off course with usual corrections. As the time getting closer to announcement of federal budget, the cyclic behavior is also being evident. However, capital gains tax (CGT) issue continues to haunt the investors. There are divergent views about CGT. Some believe at the best one can talk about the modalities. Others are of the opinion that since the tax has failed in yielding any significant increase in tax being collected from the capital market, it must be abolished. They believe the sooner the government withdraws this tax, the better it will be for the market.
Those still demanding abolishing CGT say that since various types of incomes continue to enjoy exemption, gains made at the capital market must also be declared tax-free. However, there is a consensus that the government should come up with a mechanism whereby tax being collected on a transaction must be accepted as final and no strings should be attached. They say that under the previous regime, overall tax collection from the equities market was much higher. The current crisis is being termed 'trust deficit' because of the mindset prevailing at the FBR. They insist that tax collectors must learn to accept things at face value. If no questions asked and rate is also nominal, people will be willing to discharge their obligation more diligently.
Often analysts try to compare Pakistan with other regional markets but some analysts say it is like comparing apples with oranges. Pakistan stock market just can't be accepted as 'barometer' of the economy of the country. While the number of listed companies is still above 600, bulk of the volume pertains to less than a dozen companies. Often the price movement does not reflect true condition of the listed enterprises. Lately, significant rise in prices as well as daily trading volume was witnessed in those companies, which will take years to qualify to pay dividend, due to huge accumulated losses. At times, when Karachi is a victim of precarious law and order situation or country suffers from political uncertainty, index makes significant gains.
Comparing Pakistan with India is also not justified because of the size and composition of the market: first because of the difference in size of the economies as well as the stock markets; second the quantum of inflow of FDI as well as portfolio investment; third India does not suffer on account of war on terror; and fourth better availability of energy products. India has been provided nuclear technology for civilian purpose by the United States for staying away from Iran-Pakistan-India gas pipelines project but Pakistan has not been treated at par with India.
A review of performance of Karachi stock exchange, beginning July till to date shows highly disappointing number of new listing of IPOs and TFCs. However, this dismal performance can be rationalized due to deteriorating Pak-US relationship, highly volatile political situation, and poor law and order, but the real culprit has been unending load shedding of electricity and gas. While trade an industry is ready to endure a temporary crisis, the unending miseries are because of incompetence of economic managers.
In the past, it was said that some big brokers used to set market direction. However, now the overwhelming consensus is that they have found other venues to make money by sponsoring commercial banks, fertilizer companies, and venturing into real estate business. This perception gets some credence when one looks at the recent euphoria. Bulk of the daily trading volume pertained to second and third tier scrips contrary to market being driven by those companies enjoying heavy weightage in the index. Therefore, some of the analysts said 'market hovering in the danger zone'.
Punters also say that during 2002-07 market was driven due to 'Privatization for People' program. However, since the incumbent government had got reign in control, no state owned enterprise has been listed at the local stock exchanges. On the contrary, energy companies have remained victim of circular debts. Even IPPs like Hubco and Kapco, PSO, Sui twins, and refineries have been carrying huge load of receivables.
Some of the capital market analysts say that frontline regulators are following their own agenda rather than addressing the most pressing issues. Delisting of erring companies was most required but the policy being followed is attracting a lot of criticism. While it is being said that thousands of investors have lost their 'hard earned money', some experts do not subscribe to this. They even go to the extent of saying that some critics object on every move but when it becomes that the policy is there to say they accept it but continue to make a lot of hue and cry.
It took a long time to convince that securities kept with central depository are safe and secure. Even T+3 System was opposed and KATS looked at with doubts. A lot of disinformation is also looming about demutualization of stock exchanges. Finally, President of Pakistan has signed the law but it is yet to be implemented.