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Why invest in the Karachi Stock Exchange? (KSE) Labeled as the “best performing” stock market in 2002, the Karachi Stock Exchange (KSE) is today, considered a viable investment alternative in Pakistan. For numerous reasons including strong economic fundamentals, stability of the Rupee/Dollar parity and an expansionary monetary policy amongst others, the KSE has for the past two years produced higher returns to investors seeking to gain maximum value for their investments. By presenting an objective view of the history of the KSE, it’s recovery since 1998, the present market scenario, and its future prospects this report seeks to provide evidence of the economic viability of investing in the KSE. A brief assessment of the investment alternatives within Pakistan are further provided to substantiate the feasibility of investing in the stock market.
Formed in September 1947 with only five listed companies with an initial paid up capital of Rs. 37 million, the KSE today consists of 655 listed companies with Rs. 654,171.07 million as listed capital. Despite recent performance trends and expectations of the index to cross 16,000 points, the KSE-100 index in 1998, however was as low as 765 points. Sanctions imposed after nuclear testing in 1998, a freeze on foreign exchange accounts and political instability resulted in subdued investor confidence. Furthermore, the poorly structured Corporate Law Authority (CLA), minimal automation of services, poor reporting standards, a tight monetary policy, high borrowing cost and excess capacity of key sectors created burdens for the market as a whole. Factors Affecting Investors Interest in the KSE In addition to the factors briefly mentioned above, the following factors have and will continue to have a positive impact on the market, including: 1 The formation of the Central Depository Company (CDC) in 1997 and its role in creating a transparent, efficient and secure environment for the exchange of securities. The infrastructure provided by the CDC and development of the Central Depository System (CDS) have made public offerings and trading effective and efficient for issuers and investors. The mere evidence that nearly 61% of Oil & Gas Development Corporation (OGDC) and 37% of Southern Sui Gas Corporation’s (SSGC) Initial Public Offerings (IPO) were subscribed using the CDS highlights their continued effort towards revolutionizing the financial market. 2 The divestment policy of the Government of Pakistan (GOP) by public offer of shares of state owned enterprises termed “Privatization for People” have kept investors interests alive in the equities market. Degree of Growth of the Market As of December-2007 the KSE-100 stood at approximately 13923.68 points – CAGR from June, 98 to Dec, 07 of 34%. To examine the degree of growth of the market, it is necessary to examine the historical trends of the market in terms of listed capital, market capitalization and movement of the KSE-100 index. Table-1 below highlights the increase in the number of listed companies, listed capital and market capitalization between 1950 and Dec-2007. Table 1 – No. of listed companies, listed capital and market capitalization
An interesting element portrayed by the above table is the difference or gap between listed capital and market capitalization over the years. The increasing difference or gap between listed capital and market capitalization is an indicator of the level of investor interests and profitability available in the stock market today.
Daigram-1: KSE –100 index historical trend Alternative Investment Avenues In addition to the Karachi Stock Market additional avenues of investment exist in Pakistan. The stock market of late however, has provided greater returns on investments and that too within in a short period of time, with high liquidity of investments. The following are the alternative investment opportunities available in Pakistan: National Saving Schemes National Saving Schemes dates back to independence when the Government of Pakistan (GOP) made use of Defense Savings Certificates and Special Savings Certificates amongst others to meet its financing needs. Real Estate While real estate has always been considered a profitable avenue, it requires significant capital investments. Real estate funds are also not liquid and even though returns within this sector are high, investments in real estate need to be held for many years before these returns could be realized. This form of investment therefore appeals to long-term investors as opposed to short-term investors found commonly in the stock market. Term Financing Certificates (TFC) Term Financing Certificates (TFC) were first publicly issued in 1995 with TFC’s of 29 corporations presently circulating in the market. The TFC market is relatively new and as such is still an undeveloped market. Industry analysts however predict that over the next few years an increase in the number and size of public offerings would bring about development of this market. Investments in TFC’s fall into the medium to long-term investment category and therefore are illiquid investments, offering rates of return between 3%-4%. With an inflation rate of 4%, the practicality of these investments is questionable. Prize Bonds Prize bonds like National Saving Schemes for years have been a popular form of investment in Pakistan. Though Prize Bonds do not have any rates of interest associated with them, an enormous level of funds are still invested in these bonds in the hope that investors would win bumper prizes against these bonds. These bonds are still a popular form of investment, however they appeal to the low to medium income class group of Pakistan and their relative attractiveness to other forms of investment has been on the decline. Barriers to Growth Even with strong economic fundamentals in place, there still exist factors which
may negatively impact the performance of the equities market: 1. Speculation - Over 90% of traders within the stock market are “day traders” in
comparison to “real traders”. Based on the type of trading that takes place
today, the market is highly dependant on speculation that could at times shift
the market in either direction. To protect the market and its investors from
such speculation, the KSE implemented the concept of “tolerance” by which the
price of an individual stock could not rise more than 5% or decline by 5% on a
single trading day. Further measures to counter such speculation and to increase
the number of retail investors
Comparison with Regional Markets
Earnings Multiple: Significantly lower than world stock markets
Conclusion In comparison to earlier years, currently the stock market is considered a viable investment avenue for individual and institutional investors. This report has presented a history of the market, its trends, its recovery since September 2001 and future expectations of growth. Having analyzed alternative forms of investments available in Pakistan, the KSE today provides higher returns to investors. Despite certain barriers to growth, there exist strong fundamentals, which according to analysts would bring the index level to 16,000 points thus making the stock market a profitable investment opportunity.
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