Stock market boom

Published July 21, 2014
The Karachi Stock Exchange.—File photo
The Karachi Stock Exchange.—File photo

THE stock market boom, which began with the benchmark KSE-100 index level at 11,000 points two-and-a-half years ago, saw the index cross the all-time high of an incredible 30,000 points last Thursday.

After returning a loss to investors in 2011, the market turned the corner in 2012 with a spectacular rise of 49pc, turning out to be the best performing market, second only to Japan. The bull run carried through 2013, with the index surging by another 49pc. From January to-date this calendar year, the index has already climbed by 20pc.

In effect, the booming market has been divorced from the economy, political upheavals and law and order.

“Nothing has deterred the resilience of the market,” says a major broker. “Investors have bought shares even when there has been blood on the streets,” he said, referring to bomb blasts in the country’s financial capital, which have only recently scaled down.


Some market players attribute the equities’ good performance to rising foreign portfolio investment, the country’s new MSCI FM Index ranking, and signs of economic recovery


Meanwhile, KSE Managing Director Nadeem Naqvi is clear about the market’s phenomenal growth. The evening after the index crossed the 30,000-mark last Thursday, Mr Naqvi told Dawn: “After consolidating between 28,500 and 29,500 for most of last quarter, this is a positive upside move. It indicates that the market still has momentum to move forward”.

He observed that in the last quarter, around $250m in net foreign portfolio buying occurred. Yet, the index remained range-bound. This was attributed to the loss of trading interest by local institutional and individual investors, represented by declining trading volumes. “All that changed last week, when the global rating agency Moody’s upgraded Pakistan’s rating, which saw a flurry of buy orders from local participants as well.”

Be that as it may, there is no denying that the rally, which is now deep into its third year, has been led by foreign investors. Mohammad Sohail, CEO of Topline Securities, says: “Aggressive foreign buying has seen foreign portfolio investment reach a record $6bn at the moment, from $2.3bn at the start of 2012”. Sohail attributes the market’s performance to foreign flows, smooth political change and recent signs of economic recovery.

Back of the envelope calculation by Khurram Schehzad, chief investment officer of Lakson Investments, shows aggregate foreign investment at $827m from January 2012 to-date — $125.7m in 2012; $398m in 2013; and $303m so far this year. “The inflow has been rapid in recent months, with foreign funds’ portfolio investment at $33.7m in just 18 days of July,” Schehzad points out.

The head of research of AKD Securities, Raza Jafri, believes one of the reasons for higher inflows was the change in the ‘methodology’ of the MSCI Frontier Market Index, by virtue of which Pakistan’s weight in the index was doubled to 8.4pc, lifting the country to third place after Nigeria and Kuwait.

“It makes sense for foreign fund managers to invest in Pakistani equity,” says a prominent broker. He explains, “Where in the world do you get dividend returns between six to 10pc, as in the Pakistani bourse”.

But many cynics also suspect that at least part of the KSE’s lightning growth in the last two-and-a-half years has been due to an unusual amnesty enacted in January 2012. The tax authorities declared that from that date, investors would be allowed to buy shares with no questions asked about where their money came from. The amnesty ended this June.

While many suspect it provided money laundering opportunity for ill-gotten wealth, one major broker vehemently denied that to be the case. “It was designed to encourage people with undocumented, but rightly earned funds to invest them in the market, thus bringing the cash into the formal economy and within reach of the taxman. If it was tainted money that made its way into the country, foreign inflows would have dried up after the end of amnesty in June,” he made a strong point.

A fault line in the Pakistani market is that the investor base lacks depth. “The validated number of investors [with Universal Identification Numbers] currently stands at 200,000, and half of these accounts are currently being operated,” says Mohammad Lukman, CEO of the National Clearing Company of Pakistan.

He agreed that major beneficiaries of the booming market were the government — with the highest stake in the market — and foreign investors and company sponsors and directors. However, he pointed out that small investors, by their own prudent investments within limits or through mutual funds, have shared the market’s good fortune.

So what lies ahead? KSE MD Nadeem Naqvi exudes optimism. “Pakistani market valuations are not stretched relative to both the country’s historic average valuations as well as regional emerging markets. With stability in foreign exchange reserves and the rupee, confidence in the government’s economic policy has also increased, which augurs well for investor sentiments going forward.”

Raza Jafri of AKD Securities says the local market is currently trading at forward 2015 price-to-earnings ratio of 8.1 times, which is far below the regional average of 12 to 13 times.

Published in Dawn, Economic & Business, July 21st, 2014

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