PSX looks beyond gloom

Published August 14, 2017

The current year has seen an unprecedented volatility in the country’s equity market, though not of its own making but influenced by the upheaval in a politically charged atmosphere.

But major market participants, including institutional investors, shrug off the upheaval as just a temporary irritant. They stress upon taking a long-term view.

In the winter of 2016, the Pakistan Stock Exchange’s (PSX) divestment committee completed the demutualisation process of the bourse, separating its ownership—mainly by stockbrokers—from the management.

Having bought 320 million shares of the PSX at a price of Rs28 per share, the purchase price has eroded by about 10pc in the latest market turmoil. Does that worry the Chinese investors?

Arif Habib, a former chairman of the Karachi Stock Exchange (KSE)—as it was called before the integration of the country’s three stocks exchanges (one each in Karachi, Islamabad and Lahore) into a single PSX—said that the Chinese were long-term investors who look beyond daily price movements.

Mr Habib held great promise for the PSX under the new foreign management as they were already working on new products, some of which, he believed, were ready for approval of the Securities and Exchange Commission of Pakistan (SECP).

He reiterated that the strategic investors’ experience was a major asset for the PSX, and urged the regulators, the broker fraternity and big corporates to redouble efforts to introduce retail Chinese investors to the high-yield, attractively valued PSX.

Some of the market participants told this writer that things were settling down after the recent changes at the apex regulatory body in Islamabad.

A person in the know of things said that at the PSX the term of service of the acting managing director would end on Aug 31, following which a deputy managing director (DMD), who ought to be a Chinese nominee, would be appointed on the 17th of the current month.

Going forward, market experts suggest ways to increase the scope of the PSX

Later in September, for the first time, the slot of the PSX managing director (MD) would be offered to a foreigner, an already selected Canadian capital market expert. On the business development side, a person familiar with affairs at the PSX told this writer that in March the exchange hired McKinsey & Company to study and suggest solutions to remove roadblocks that have resulted in the capital market’s stunted growth.

McKinsey was mandated to recommend introduction of technology-based tools and products.

The consultants have prepared a comprehensive study, which would be discussed by the PSX board at a meeting on Aug 15 and 16 with the SECP, headed by its new chairman, Zafar Abdullah. The consultants have provided solutions to regulatory issues regarding the launch of major products such as Exchange Traded Fund (ETF), Index Futures and Options.

They have also suggested measures that could double the daily volume of trade at the stock market and identified weaknesses, which if removed, can increase PSX’s revenues in a year.

The exchange also needs to attract new listings. Five new companies with aggregate listed capital of Rs11.8 billion have already entered the market this year, which carries the total number of listed companies on the PSX to 561.

The daily turnover in 2017 has averaged at around 310m shares while the average value of daily turnover runs up to Rs15.2bn.

Incidentally those are the highest numbers in the last five years, which is an encouraging sign in an otherwise bleak year. Total market capitalisation, which crossed the Rs10 trillion mark in May this year, currently stands at Rs9.6tr, which again is the highest in five years.

But the number of listed companies at less than 600 is still minuscule in comparison with the registered entities with the SECP that stands in the vicinity of 100,000.

Going forward, market experts suggest lower taxation for listed companies compared to unlisted entities, scrapping tax on dividend and bonus issues, reforms in the rate of capital gains tax.

They emphasise simplification of stringent regulations and ‘Code of Corporate Governance’ which could attract larger a number of private companies to mobilise funds from the equity market.

“Yet, there are about five to seven new initial public offerings (IPOs) in the pipeline,” affirms Khurram Schehzad, chief commercial officer at JS Global.

He elaborated that those include an offer each from a company in the pharmaceutical sector, a food entity, a power sector unit and two modarabas.

Mr Schehzad contended that both the number of new offerings as well as their size was growing.

“Against the offer of stocks worth Rs500m to Rs2bn in the past, the recent and upcoming new IPOs from the private sector are of the huge size of Rs4bn to Rs7bn,” he says.

The market too has an insatiable appetite to absorb them all due to ample liquidity with institutional participants such as banks, insurance companies and the ever-growing mutual funds industry.

According to one estimate, 90m retail investors trade in the major markets, Shanghai and Shenzhen.

Since together the China Financial Futures Exchange Company Limited, Shanghai and Shenzhen Stock Exchanges form the consortium that now owns the majority strategic 30pc shares of the PSX, their expertise would be useful in broadening the base of the local stock market.

It could also help spike the number of investors, which for years has remained at just about 300,000 in a country of more than 200m.

“The number of investors in the PSX could receive a big boost, once the Chinese retail and institutional investors step in, which could be followed by cross-listings between the exchanges in the two countries,”

Mr Schehzad believes.

Published in Dawn, The Business and Finance Weekly, August 14th, 2017

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