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KARACHI: Around 5 years ago, investors at the Pakistan Stock Exchange (PSX) rejoiced as the KSE-100 – widely seen as a benchmark for market performance – hit its peak. Index-heavy stocks such as Lucky Cement were trading at close to 1,000 bucks a share — back when 1,000 got you around 9 US dollars.

Fast-forward to 2022, and the situation has become un-recognisable. Investors who held and placed faith in one of Pakistan’s largest cement-makers would see their portfolio cut to half. Lucky is now trading at around Rs510 — less than 3 US dollars. The situation is worse for some of the other KSE-100 companies.

The index itself has retreated from a peak of 52,876.46 on May 24, 2017 to 42,863.15 at the end of closing on May 11, 2022, a fall of nearly 19%, but doesn’t begin to tell the entire story. The rupee, then at 105, has collapsed — it ended at 190.02 in the inter-bank market, and was selling at 192 in the open Wednesday.

Another record low: Rupee crosses 190 as currency's ride into oblivion continues

So what happened to the PSX, which not too long ago was declared as the best performing market in Asia and even among the top in the world.

“The challenge PSX is facing is that liquidity has been declining over a period of time,” Adnan Afridi, Managing Director of National Investment Trust Limited (NITL), told Business Recorder in a recent interview. “There are two reasons — one is a good reason, while the other is a bad deal.”

“The good reason has been that over time, because of various requirements, the PSX has been at the forefront of tightening regulations as to the type of money that could go in,” said Afridi, referring to Know Your Customer (KYC) requirements brokerage houses have been directed to follow.

“Only completely documented funds can come into the sector. This meant that liquidity, compared to real estate where you have an amnesty, would be less.”

Late buying helps KSE-100, but index still closes 641 points lower

Afridi, however, then quickly pointed out that the second reason has been much lower foreign participation. Cumulatively, Foreign Investors Portfolio Investment (FIPI) has been a negative $353 million since May 1, 2021, according to data maintained by the National Clearing Company of Pakistan Limited.

“We used to have foreign funds and that has almost dried to negligible. There is (also) a country risk. It is again a function of our exchange rate,” added the Harvard University graduate, opening the door for the rupee depreciation, a hot topic these days.

“Investors are not going to take an exposure on OGDC and then take an exposure on the rupee as well. That is just a bridge too far for them.”

Pakistan’s rupee has fallen consistently in each and every year since 2017, and 2022 has been no different. A 7% fall has occurred in less than six months already, pushing the currency to its all-time low.

Afridi pointed out that, combined, these factors have resulted in a lower average daily volume, creating a shortage of buyers and sellers.

An interview with Adnan Afridi, Managing Director, National Investment Trust

“When I was CEO of the stock exchange about 12 years ago, average daily volume traded used to be about $200 million. Now it is less than $20 million — there is no price discovery. The outlook to the market is really all dependent on how we increase liquidity.”

Afridi said the PSX could increase liquidity through initial public offerings and encouraging investors, whether institutional or otherwise, not to be short term in their thinking.

“They need to allocate long-term funds to the market, either directly or through mutual funds.

“You need to start digital onboarding at the retail level — you do not need to go and set up a branch in other cities and towns. You can reach people through their mobile phones but for that you need some basic financial literacy tools.”

Can Pakistan's stock market survive an inflation tsunami?

Copyright Business Recorder, 2022

Bilal Memon

Bilal Memon is the Head of Digital Content at Business Recorder. His Twitter handle is @bilala_memon

Comments

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MD May 12, 2022 09:31am
The real reason is regulatory regime which discourage bringing in retail customers. Brokage houses are not only required to ask very personal questions from the customers for KYC but also have to submit atleast 100 different regulatory reports to various regulators; PSx, Secp, Cdc, nccpl etc every three months period. On top of it, each Broker is subject to atleast 12 various audits every year keeping their focus out of business building. Having a small retail account is simply not viable. Untill regulators realise the current regulator framework is an over kill, market will remain dead as foreign funds participate on the strength of local participation to enable price discovery.
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