Pakistani stocks yielded a stellar return of 49 per cent in the year 2012, which placed the Karachi Stock Exchange among the best performing markets in the world.

The KSE-100 index galloped by an incredible 5,545 points during the year, starting out at 11,347 points and ending at around 17,000 points — almost three times its previous all-time high.

Only a year earlier, the KSE had produced jaw dropping negative return for the investors. So what brought on such incredible transformation? Most stock brokers argued that the double-digit dividend growth and low valuations of Pakistani equities was the fuel that fired the stock boom.

Yet, cynics are attributing the giant leap in stock prices to other weird reasons, foremost the possible inflow of ill-gotten wealth following the grant of amnesty in early Jan 2012 that facilitated ‘whitening’ of ‘black money’ by unscrupulous elements.

On January 11 of last year, Finance Minister Dr Abdul Hafeez Sheikh, announced blanket approval of all proposals forwarded by the Securities and Exchange Commission of Pakistan for the country’s capital market.

To revive a dying stock market, SECP proposed a raft of measures, most important among them being the centralised collection and calculation of Capital Gains Tax (CGT) at the National Clearing Company of Pakistan Limited (NCCPL) level, in order to shield individual investors from the hassle of paperwork and interacting with the tax officials.

And acknowledging that the investors had made legitimate but undocumented gains during the CGT exemption period (1974-2010), the government decided that ‘no questions would be asked by the Federal Board of Revenue about the source of funds to be invested in stocks till 2014 and to treat total wealth as white from 2014 onwards’.

Securities and Exchange Commission Chairman Muhammad Ali told Dawn on Thursday that the acceptance of SECP proposals by the government did have positive ramifications on the market. The collection of CGT through NCCPL had created a hassle- free environment; the number of investors in stocks was growing. He said it had helped deepen the markets and generate volumes and attract new investment that would help in economic and industrial growth.

Yet the cynics are shocked. “In granting such blanket amnesty to ‘ill-gotten’ wealth, the government legalised money laundering through the stock investment,” objects one. He insists that the spectacular rise in stock prices during 2012 was triggered by the huge inflow of ‘black money’ into the market.

A former regulator thought that the amnesty was declared basically to benefit the broker community. “Having suffered huge losses in real estate in the country and abroad, the stock brokers had once againr eturned to equity”. He added that trading at attractive low valuations, the brokers required laws that could provide them the opportunity to pick up shares through ‘benami accounts’ without the fear of future accountability.

But a major stock broker disagreed and asked: “Who says the stock market is the best conduit to whiten black money?” He argued that the easiest and almost invisible way to wash off the dirt from ill-gotten wealth was the prize bonds scheme. He thought that it was this option that was mostly used to whitewash the black money, without leaving a telltale trail.

No one is able to figure out the inflow of undocumented wealth into the stock market in 2012. Many stock strategists agreed that the growth in volumes could be one indicator. In the outgoing year, average daily volume rose by a huge 119 per cent to 173 million shares, from 79 million shares of average daily trading in 2011. The value of shares traded also rose to R4.7 billion from Rs3.5 billion. The year 2011 had witnessed foreign portfolio outflow of $125 million while in the outgoing year, foreigners were net buyers of $125 worth of equity. Some suspect that a tidy sum of inflow in 2012 could be the stashed away as undocumented wealth.

Khalid Mirza, former chairman of SECP and the Competition Commission of Pakistan stressed that it was very difficult to separate the documented and undocumented inflows in the equity market. He was, however, of the view that the effect of incentives and news on stock market was of transient nature.

“Markets go up and down in their own steam”, he said. He contended that undocumented wealth entering the market could give a temporary boost to the equity prices when the market is on the rise and it could provide a respite to a falling market, but all that was scarcely sufficient to change the direction of the market. “Market movement is 90 per cent psychology and 10 per cent economy”, said Mirza.

Hamad Aslam, head of research at Lakson Investments stressed that the amnesty scheme had only helped in ‘price discovery’ and there was no bubble or artificial hike in prices. The caveat was the speculative element in the worthless shares among those that have seen huge price appreciation in the textile and cement sector. He conceded that there was no major change in price-to-earnings ratio which stood at 5.5 in 2011 and is six times at the moment, but he attributed it to a concurrent growth in corporate earnings.

Muzzammil Aslam, MD, Economic Research said one of the major reasons for phenomenal rise in stocks was the 450 basis points cut in policy rate by the SBP in the last 18 months to 9.5 per cent, which resulted in diversion of flow of funds from government securities to equities.