Capital market: development still missing

Pakistan capital market, especially the stock market has been the talk of the town over the past one year. The benchmark KSE-100 index is up almost 40 percent since the start of the fiscal year which makes the equity market best performing in Asia Pacific. Pakistan Stock Exchange after a hiatus of nine years has again been included the Morgan Stanley Capital International (MSCI) Emerging Market index.

However, in spite of good returns over the last five years, the equity market has not been able to attract enough new companies for listing. According to the economic survey of 2017, since the start of FY13 only 28 new companies have been listed and about 290 billion rupees funds were mobilized, a majority of which were allocated to government stake sale of HBL, UBL and PPL. In FY17 there have only been five new listings.

In a growing economy more companies should be looking towards the equity market to get requisite funding but because of strenuous procedures and outdated mechanisms, this essential part of the economy still remains untapped. Although market capitalization has increased due to performance of listed companies but relatively there is still a lot of room left.

Currently the market capitalization to GDP ratio is around 30 percent while average in Asia is around 70 percent. In terms of capital markets development, a report by Mckinsey puts Pakistan in second last place in Asia.

Moreover, the pertinent institutions have also failed to attract the general public towards this mode of saving. There are only about 240,000 active UINs which for a population of almost 200 million and middle class of 80 million plus is a very low number.

On the development side, the SECP came out with a Capital Market Development Plan (CMDP) in 2016 in which various new reforms were mentioned that would be implemented by 2018. Looking at the timelines of those reforms, most of them have been introduced in terms of legislation but proper implementation has been lacking.

The stock market is still missing a comprehensive financing product while some archaic products are still running. Even foreign investors for months have given their recommendations on getting the market at par with regional market in terms of technical aspects but so far very little work has been done on the ground.

The regulation of brokers has also been done in such a manner that it has mostly disturbed market activity and actions which should have built investor confidence have done the opposite.

The SECP overall seems to be more active than before as after the stock exchange stake sale to the Chinese, the new management would want to increase volumes in the market substantially so that their investment bears return. To increase volumes, the SECP needs to fast-track the implementation of a new products such as refined margin financing, exchange traded funds and options.