During the year 2003, the Pakistan’s capital markets managed to hold to the rally that had started the year ago. There were a few abrupt interventions, but the Karachi Stock Exchange Index of 100 shares continued its journey north to close at 4,305 few days before the end of the year.

That meant rise of nearly 1,700 points or about 60 per cent during the year. The stalwarts at the market bragged about KSE retaining its position of being “one of the best performing markets in the world”. Galvanizing by 112 per cent, the KSE had outperformed most markets in 2002, as well.

It would be difficult to belitte the efforts of the Corporate regulators—Securities and Exchange Commission of Pakistan (SECP) and the KSE— in putting reforms in place that helped lift the market. But on no small amount the stock prices had flared up due to excess liquiity. Following the September 11, 2001 incident, the country had witnessed unprecedented amount of money in remittances from overseas.

Both the local investors as well as some fund managers had reason to opt for the Pakistan’s equity market. For the local investors, the assets values in Pakistan had substantially increased, but one of the best options over the last two years still looked to be the stocks. On an average, the equities still offer two digit dividend yield.

This is considerably higher than other options: Bank interest rates have never been as low as 3 to 4 per cent on deposit and that also on the maximum balance. The 10-year maturity Defence Saving Certificates carry return of 8.50 per cent; 2.27 per cent higher than the 10 year PIB rate of 6.23 per cent. Similarly the 5-year regular income certificates and 3-year special savings certificates are offering 7.68 and 7.67 per cent, respectively.

For some of the foreign fund managers who were looking at the developing markets, the Pakistani equities, for the first time in years, began commanding a bit of interest. The reason being that the 10 per cent dividend yield offered by KSE stocks was higher than most regional markets.

The Mumbai Stock Exchange offered as litte as 1.90 per cent and even some of the more developed markets such as Malaysia and Singapore gave reuturns of 3.01 and 3.78 per cent, respectively. But despite offering higher returns, the Pakistani stocks appeared to trade at attractive valuations. Inspite of having risen considerably during 2002, the KSE stocks are on price-to-earnings (p/e) multiple of 9.50, compared to the high multiples of India’s 14.10, Malyasia 15.48; Singapore’s 18.27 and Taiwan’s 21.77;

The KSE achieved some of the landmarks during the year. On December 1, this year, KSE-100 index rose by as many as 195 points which was the highest single day rise. Also during 2003, the index touched the highest level of 4,604 points on September 12.

There were other distinctive features of the market for 2003 such as the highest ever single day turnover of over a billion shares (in both ready and futures counters) on August 8. The KSE market capitalisation jumped up to Rs 898 billion, which was equivalent to more than US dollars 15 billion and at the highest point so far.

The fly in the ointment was the lack of new equities. Only 3 companies, which included Ittehad Chemicals; TRG Pakistan Limited and Mashreq Bank Pakistan, tapped the market to raise just Rs 2.5 billion by the offer of new equity. But towards the end of the year came the huge Initial Public Offering (IPO) worth Rs 6.9 billion floated by the Government to disinvest 5 per cent shares in Oil and Gas Development Company Limited (OGDC).

This was billed as the largest ever stock offering in the Pakistani equity market and was expected to add another US$130 million to market capitalisation.

During the year 2003, ten companies announced voluntary de-listing after buy-back of the small investors’ equity by the sponsors. And an equal number of companies stood de-listed due to merger/amalgamation. The listing of new debt instruments also slowed down during 2003. Six companies—Quetta Textile Mills; Union Bank; Security Leasing; KASB Leasing; Trust Leasing and Ittehad Chemicals went to raise capital through Term Finance Certifiacates (TFCs) in the aggregate sum of Rs2.5 billion.

The Government kept delaying the privatisation of Pakistan State Oil (PSO). And the punters made profit by rumours as suited them best. The Privatisation Commission has announced that it would persue the disinvestment in shares of Habib Bank Limited; Pakistan Petroleum Limited (PPL); Sui Southern Gas Company (SSGC) and others. If the privatisation plan is persued in right earnest it would deepen the market and expand the investor base.

Besides the liquidity, there were other factors as well which contributed in keeping the trend at the market firm. The country posted an economic growth of 5.1 per cent during the year, foreign exchange reserves increased to cross Rs 12 billion; inflation stood at just above 3 per cent. Interest rates in Pakistan are at their lowest level ever and foreign exchange reserves at their highest. The Central Bank expects home remittances during financial year 2004 to loom large at around US dollars 4.2 billion. On the political side, the Government had to grapple with the problems of LFO and the insistence of the opposition for the President to shed his army uniform. But on the external side, there was first thaw and then improvement in relationships with India. All of that gave comfort to the local and more importantly the foreign investors.

During the year, the flambuoyant chairman of the Securities and Exchange Commission of Pakistan (SECP), Khalid Mirza stepped down on completion of his tenure. But the corporate regualtors pressed ahead with their reforms agenda. The requirment of presentation of quartely accounts provided the investors with timely financial figures. The reforms undertaken by the KSE included changes in the Exposure regulations and valuation policy for deposits; introduction of procedure for squaring up of failed deliveries through KATS; launching of new trading software system with enhanced capacity developed in-house and providing of internet gate-way facility to members; Amendments in the Regulations governing Associate Membership of the Clearing House; Framing of Terms of Reference for Members System Audit; Standarised Account Opening Form; improvement of human resources & general administration; face lifting of building & premises infrastructures and finally introduction of trading in Odd-lots.

The important event on the agenda of reforms for the next year (2004) is the phasing out of the Carry Over Trade (COT), commonly known as ‘badla’ with margin financing. The State Bank of Pakistan has already come forward with the margin financing reguations, which might be finalised during 2004.