Many market participants said that though the investors were returning in droves to trade in shares since the announcement by the former finance minister, the market still anxiously awaited the SRO by the Federal Board of Revenue. - File photo

KARACHI: Riding on the wave of rallies in regional markets, the Pakistan equities have also gained 11.1 per cent since the start of the current calendar year.

A big contribution has come from a quick rise of five per cent in equity values in the last few trading sessions.

The price spurt is supported by the return of small investors, represented by a surge in daily traded volumes.

Compared to last quarter average daily volumes of 59.7 million shares, valued at Rs2.8 billion or $32.2 million, the average daily volumes at the KSE in the current quarter has mounted to 119 million shares, worth Rs3.7 billion or $41 million.

The volumes though far lower than average daily trading in 300 million shares of the value of Rs24.8 billion or $417.5 million, witnessed in the golden era of 2003-07, they nonetheless signify a return of the small investor to the market. The confidence appears also to be souring in purchasing shares on borrowed money. The curse of the ‘badla’ is buried in memory.

Mohammad Sohail, CEO at brokerage Topline Securities, points out that leveraged positions in Margin Trading System (MTS) -- the replacement of the ‘badla’ -- and ‘futures’ have also increased.

He affirms that “those are not at alarming levels so far and far lower than what they used to be in the past.”

A booming stock market and recent margin relaxation and allowing individuals to lend in MTS by the regulators, have all helped ‘open interest’ in the MTS to climb.

On Tuesday, Feb 22, the amount stood tall at Rs877 million. “This level of around Rs900 million is seen for the first time since the new leveraged product was introduced by the regulators in March 2011,” says Sohail.

He asserts that the MTS rate, however, is not on the rise and the average gross rate settled at 16.7 per cent on Tuesday.

“This gives comfort that the market is not over leveraged and there is enough supply of funds in the MTS market,” says Sohail and recalls that years ago when the Karachi bourse was considered to be one of the most actively traded market in Asia, the ‘badla’ financing (sometime called CFS and COT) averaged Rs33 billion with average rate of 15 per cent between 2005-07.

Compared to that, open interest in the current month (Feb) contracts amounted to Rs1.4billion.

Furqan Punjani at BMA capital attributed the share price rise since January this year to much needed announcement of amending Capital Gains Tax (CGT) filings rules addressing source of funding clause.

The share in trading activity of the ‘individual’ class of investors, post the above announcement (on Jan 15, 2012) climbed to 60 per cent from low of 40 per cent in June 2011. “This has also put to rest the speculation that government may not be able to honour its commitment,” says Punjani.

He also mentions that the participation by ‘individuals’ has generated massive activity in low priced stocks.

The analyst pointed out that though the activity seemed to be driven by speculation, the turnaround stories primarily in cement companies and investment gains in holding companies were the fundamental factors behind current rally.

According to the analyst, the small individual investor was the worst hit from imposition of CGT, which was why his participation in daily trading activity had sunk to 40 per cent before the former Finance Minister announced the needed changes in CGT.

Earlier in Jan of 2010, the individual share in trading was 57 per cent, which set a spell of the driest season at local bourse with volumes dipping to their lowest in 12 years; average daily turnover fell to 95 million shares ($44 million) in FY11, even lower than 106 million shares ($57 million) witnessed in FY09, when trading activity had been brought to a halt for over three months, by closing the exit door, through the infamous ‘floor’.

Many market participants said that though the investors were returning in droves to trade in shares since the announcement by the former finance minister, the market still anxiously awaited the SRO by the Federal Board of Revenue.

“It is being considered of vital importance in the settlement of the CGT issue for good,” said one.