Pakistan markets look to post-poll
gains By Syed Fazl-e-Haider
QUETTA, Pakistan - The country's stock
markets, which reacted positively to February 18
parliamentary elections and the relatively
peaceful environment in which they were held, are
placed to capitalize on past and proposed reforms
and resume the strong growth they experienced
under the outgoing regime of President Pervez
Musharraf.
The benchmark Karachi Stock
Exchange (KSE) 100-share index surged by 4.4%, or
626.82 points, last week to close at an all-time
high of 14,980 points and adding 5 billion rupees
to market capital that soared to a record of 4.61
trillion rupees.
Trading in the week
before the polls reflected the prediction that
they would be marred by violence, with average
market volume a
relatively subdued 259.5
million shares compared with 360.8 million shares
last week.
The recovery boosted the KSE
price-to-earnings (P/E) multiple rising to 10.7 to
11.1 times 2008 earnings after the poll compared
with 9.5 times prior to the elections.
The
real market direction will be determined by
subsequent political developments, including the
formation of a new government and transfer of
power to the elected members, though volatility,
higher during the period after the December 27
assassination of former Prime Minister Benazir
Bhutto the subsequent postponement of elections
from January 8, may subside.
The KSE
100-share fell by 1,400 points, or 10%, during the
first three trading days in January, losing 400
billion rupees in market capital before recovering
906 points, or 6.82%, in the last two trading days
of the week. The benchmark, with a recovery of
about 11%, is now well above the pre-Bhutto
assassination level.
Before the elections,
and after the Bhutto killing, cumulative outflows
of foreign money reached US$37.16 million on
January 8, leaving only $2.59 million in the
equity market, while local players were not
inclined to take fresh positions due to the
political uncertainty.
Both the leading
winning parties, the Pakistan Peoples Party (PPP)
of slain Benazir Bhutto and the Pakistan Muslim
League (PML) of Muhammad Nawaz Sharif have had
previous goes at ruling the country, alternating
over 11-years from 1988 to 1999.
Their
performances on the economic front were less than
ideal, reflected by a much-improved stock market
during the past eight years under President Pervez
Musharraf - who took over in October 1999 after
ousting the democratic government of Prime
Minister Nawaz Sharif - and former Prime Minister
Shaukat Aziz.
Musharraf implemented a
series of reforms to achieve macro-economic
stability that helped the KSE-100 grow at a 34%
compound annual rate to about 13,923.68 points
last December from June 1998, when it was as low
as 765 points. The KSE-100 index now consists of
655 listed companies.
The markets were
burdened before the Musharraf government by a
poorly structured Corporate Law Authority (CLA),
minimal automation of services, a tight monetary
policy, high borrowing cost and excess capacity of
key sectors. Economic sanctions against Pakistan
following the May 1998 nuclear tests and political
instability further weakened investors’
confidence.
Pakistan's GDP growth rate
slowed to 4.4% per year between 1990 and 1995,
from around 6.5% annually in the previous decade,
with average real GDP growth from 1992 to 1998
dipping to 4.1% annually. By early 1999, the
country was on the verge of an international
default that was averted by the partial waiver of
sanctions and the subsequent reinstatement of
Pakistan's IMF enhanced structural adjustment
facility.
Despite that history, investors
seem willing to give the PPP and PML-N another
chance in a democratic set up, not least as the
past year's deteriorating internal security and
political turmoil under Musharraf severely dented
investors’ confidence.
KSE under
President Musharraf In many ways, they have
a stronger based to work from thanks to reforms
instituted by Musharraf. The KSE-100, launched in
1991 with a base of 1,000 points, rose 1,770
points by 2001 and ended the 2005 fiscal year with
a gain of 41.1%, or 2,171 points, at 7,450 and by
the first quarter fiscal 2007-08 had almost
doubled to 13,772.
The KSE-100 under the
Musharraf administration has been the best
performing benchmark among Asia’s emerging
economies. That performance reflects in no small
part a strengthening economy. During the past five
years, GDP has grown around 7% annually and FDI
flows and rising exports have expanded, with the
country's equity markets attracting about $1
billion last year.
In the current
financial year however, the inflow of foreign
investment has declined mainly due to withdrawals
by foreign portfolio managers from the stock
markets. Overall foreign portfolio investment
declined to $103.2 million in the first six months
of this financial year, a 92.1% plunge from $1.31
billion in the same period 12 months earlier. The
decline came even after after the country received
$90.5 million through the sale of global
depositary receipts of United Bank Limited. Local
analysts see political instability as the main
reason for the withdrawals.
Demutualization process As the
new government moves to take office, the prospects
for the market are looking better with the
approval last month by the caretaker federal
government of a demutualization ordinance, which
will bring about an improvement in the governance
structure and make the stock exchanges more
competitive.
International stock exchanges
in Dubai, South Korea, London and Norway have
shown an interest in acquiring stakes in
Pakistan's demutualized counterparts, according to
the chairman of Securities and Exchange Commission
of Pakistan (SECP).
The ordinance empowers
the SECP to approve schemes of integration of two
or more stock exchanges without recourse to the
High Court, whose approval was previously
necessary in a time-consuming process.
The
ordinance was due to be signed off on by
Musharraf, but it will now will be up to the new
country's economic managers following the February
18 elections to decide how they deal with the
issue. According to the SECP chairman, the
demutualization process will be completed within
the period of 119 days following promulgation of
the Ordinance.
The ordinance is expected
to open new avenues for Pakistan's stock exchanges
and bring new investment products to the country.
The process picked up pace immediately after FTSE
Group, the global index provider, announced on
January 17 that it had deferred its decision to
remove Pakistan from the FTSE Global Equity Index
Series (GEIS) as of June 2008 - a move that was to
have been made on the grounds that the stock
market failed to meet minimum requirements under
quality of markets criteria.
The FTSE
Group, as part of its annual country
classification review, on September 12, 2006
announced it had placed Pakistan on its Watch List
for possible removal from the FTSE GEIS, which is
used by institutional investors worldwide.
In recent years, the SECP implemented
significant reforms in the areas of risk
management; governance and transparency; market
development; investor protection and investor
education, which have helped to boost and broaden
the capital market.
With demutualization
looking unstoppable, Pakistan's exchanges are
evaluating their various assets. Karachi Stock
Exchange has hired Deutsche Bank for the purpose,
while the Lahore Stock Exchange (LSE) has hired
Rotch Bank. Initial public offerings (IPOs) of
their shares are expected within the next six
months.
The IPOs are expected to result in
strategic investors and local financial
institutions holding 40% of the exchanges' shares;
the general public 20%; and existing brokers 40%.
Future outlook Some analysts
believe that the stock markets' bullish trends
following the February 18 polls reflect that the
future economic outlook may be positive even
though rising inflation and deficit financing will
continue to haunt the new government.
They
have valued Pakistani equities at a P/E of 12
without the political uncertainty and they
forecast earnings growth of 15% in 2009, compared
with negative returns in G7 countries and 10%
growth in other Asian markets
According to
former KSE chairman Arif Habib, the success of the
elections in a peaceful and fair environment is a
positive omen for the economy in general and the
stock market particular. A smooth transition of
power to the winning parties will further help to
restore foreign investors’ confidence and pave the
way for resumption of dollar inflows into an
equity market, not least because Pakistan is
considered as one of the cheapest investment
options available.
According to a report
published by online trading platform Live Trade,
the KSE today provides comparatively higher
returns then elsewhere in the region. As a pointer
to the future possibilities of growth, a
memorandum of understanding was signed between the
KSE and Dubai Securities Market on February 17, to
develop and strengthen capital markets activities
in the region.
Syed
Fazl-e-Haider, sfazlehaider05@yahoo.com, is a
Quetta-based development analyst. He is the author
of six books, including The Economic Development
of Balochistan, published in May 2004. (Copyright 2008 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
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