The recent performance of the Pakistan stock market and its outlook

[dropcap]F[/dropcap]or considerably long time Pakistan stock market has remained one of the best performing markets of the world. While there is no reason to doubt this statement, during the financial year 2016-17 volatile geopolitical conditions, election in the United States, Britain and France and Britain’s decision to take an exit from the European Union (EU) kept the foreign investors’ focus on their domestic markets, rather than venturing into the overseas markets. Initially, India under Modi’s leadership managed to attract the attention of foreign investors as well as non-resident Indians, but soon the baloon started deflating.

During financial year 2016-17, the benchmark index of Pakistan Stock Exchange (PSX) opened the year at 37,966.76, touched a new high of 52,876.46, slipped to 44,914.45 but finally managed to close the year at 46,565.29 points. The story of this rise and fall can be attributed to various factors. If one excludes local political uncertainty and geopolitical factors, the performance seems pretty good. However, there is also a need to have a closer look at the following graph, which can help the policy makers in redefining the policies and introduce some structural changes.

Some experts say that the hike in the price of the shares of blue chip companies can be attributed to paltry free float. A test case is OGDC, Pakistan’s largest exploration and production (E&P) company. It enjoys attraction of the investors in general and attention of foreign fund managers in particular. According to some reports one of the foreign fund managers has the largest stake in this company. OGDC pays a handsome dividend every year and it may not be wrong to say that investors have earned phenomenal return, which has also resulted in the huge repatriation of dividend income. Besides this, two other companies, namely PPL and POL enjoy special attraction for the foreign fund managers. These companies also have heavy weightage in the Index, any rise/fall in the prices of these shares affect the index.

[ads1]

Two factors, number and listed capital indicate the inherent weakness of Pakistan’s market. The number of listed companies has remained almost stagnant that needs to be probed. Analysts attribute this to various factors that include: 1) lack of interest of sponsors to get their companies listed, 2) fear of disclosure, 3) no tax incentive for public limited companies, 4) taxing of dividend income and 5) imposition of capital gains tax. The adverse impact of capital gains tax does not encourage insurance companies to invest in the shares of the listed companies. In the past insurance companies used to play a vital role in the capital formation.

PSX (formerly known as Karachi Stock Exchange) has a history of more than half a century, but the number of retail investors has remained disappointingly low. The bulk of the outstanding shares is held by foreign fund managers, mutual funds, corporate entities, banks and high net worth investors. Some analysts term it a strength, but others call it is a serious threat. The big stakeholders attain the power to set the direction of the market. Substantial buying/selling by these types of investors creates volatility in the market that prompts the weak holders to sell and big investors to buy.

It is often suggested that Pakistan Stock Exchange (PSX) and Securities & Exchange Commission of Pakistan should should organize ‘Awareness Sessions’ regularly. However, one is completely astonished to hear statements like, stock exchange is a gambling den, the market is driven by less than half a dozen brokers, insiders’ trading is common and above all the front line regulars often fail to read growing balloon till it bursts. One may not subscribe to all these statements, but has a right to demand the regulators to play a more proactive role.

It was feared that after the amalgamation of three stock exchanges to form Pakistan Stock Exchange may have some adverse impact of the daily trading volume. However, these apprehensions proved baseless, due to the role played by PSX management under the able guidance of its Managing Director, Nadeen Naqvi. Deployment of technology at PSX and an outstanding role played by Central Depository Company Limited (CDC) and National Clearing Company of Pakistan Limited (NCCPL) that made the transition process extremely smooth.

To increase the depth of Pakistan market, the GoP must list all the public sector companies at PSX, offer their shares to the general public and also impose a restriction on the holding of shares by the sponsors. It is often said that in some of the listed companies sponsors hold up to 90 percent shares, which makes these entities improvised shape of sole proprietorships.