Equity markets: Moves to improve price discovery

"KSE crosses one-year high volumes at 204 million shares by now", InvestCap head of research Khurrum Shehzad texted in a market update at three oclock, yesterday (Monday) afternoon. By the time the days trade drew to a close, all-share volume had surpassed 230 million shares. After a long wait, it appears Santa Claus came to town for stock brokers and investors alike, in the form of Finance Minister Hafeez Sheikh. Whats more, judging by the broad-based buying spree on Monday which took the KSE 100-index over 12,000; it seems everybody loves the gifts he brought. "The KSE-100s stellar 6.9 percent rise last week... was vindicated by GoP acceptance of all the proposals suggested by SECP and KSE in connection with the revival of local equity markets" chimed in Mondays AKD Daily research report. In fact, brokerage houses are so roused that there appears new found consensus that the benchmark index could flirt with the 14,000 level much before 2014. Perhaps the fine print under such predictions should also mention, not any time soon! For starters, accepted changes such as freezing of the CGT rates and the elimination of withholding tax on equity trade will only come into effect through the next Finance Bill, not due until mid-2012. Similarly, clear guidelines regarding CGT calculation by NCCPL are also wanting. Upon implementation, these steps will improve liquidity at local bourses, which should in turn help better price discovery. But even 20 percent annualised returns are far from stellar in an environment where inflation is wedged in double digits. That said Finance Minister Hafeez Sheikh and his team have now taken the stick of CGT to the equity markets and followed it with the carrot of temporary relaxation in disclosure requirements, along with liquidity inducing measures. The tax brackets of eight and ten percent for the application of CGT still leave a lot to be desired, both in their ability to encourage long-term shareholdings and in terms of effective revenue generation. But to its credit, the government has stuck to its guns, at least on the implementation of this tax. The better price discovery and spur in price and book multiples paves the way for mergers and acquisitions, corporatisation as well as the listing of government and private entities and privatisation of state owned entities. Investment bankers and corporate finance experts should be pulling up their socks right about now!