The fiscal year (2006-07) just ended has witnessed an unprecedented surge in the capital market of Pakistan. The Karachi Stock Exchange, one of the most active share markets in the region, posted a growth of 38 percent during the year ended June 30, 2007, with the index closing at an all-time high at 13,772 points, depicting a huge gain of 3783 points over June, 2006.
The year, in fact, could rightly be termed as eventful since it marked the sixth consecutive year of bull-run. The market capitalisation also grew at a remarkable rate of 51 percent, reaching its peak at Rs 4 trillion ($66 billion). However, the growth of the market occurred amid very thin volumes. Turnover during FY07 averaged 210m shares, which was the lowest since FY02, as a result of which the average daily value also shrank to a three-year low of Rs 22 billion ($362 million).
During the year, 13 new companies got listed in the stock exchange compared to nine in FY06. The KSE growth, however, loses some lustre when compared with the regional markets, which on average depicted a growth of 48 percent, with the Chinese market (Shanghai Composite) witnessing a 129 percent upsurge followed by Indonesia's Jakarta Composite with a growth of 63 percent. When comparing the earnings, multiple and dividend yields, KSE emerged as the second most attractive market in the region.
The reason for the buoyancy of the market is no secret. The recently released Economic Survey of the government lists eight factors leading to booming conditions in the market.
These included continuous improvement in the country's economic fundamentals, government's commitment to its reform agenda and pro-market policies, stability in exchange rate, regionally cheap valuation of the scrips, large scale mergers and acquisitions, improving relationship with the neighbours, successful GDR offerings and increase in Pakistan's coverage by large international brokerage firms and investment banks.
In addition, Pakistan's privatisation programme also provided support to different sectors and corporate valuations. While nobody could possibly deny the positive impact of each of these factors, we feel that the biggest push to the market was caused by the interest shown by foreign investors with huge liquidity at their command, looking for investment opportunities throughout the world.
Foreign portfolio investment in Pakistan's stock market during the first ten months of the past fiscal year amounted to $1.82 billion, which was the highest ever inflow of such investment in the country's history. Obviously, like other regional markets, Pakistan's equity market attracted a portion of increased liquidity flowing into Asia.
This could be confirmed by the fact that foreign funds hold 7.72 percent of the market cap, as against 3.28 percent in June, 2006. The market cap includes the current foreign holding (adjusted for conversion) of MCB, OGDC, and UBL GDRs. One barometer of this is the Special Convertible Rupee Account (SCRA) which now stands at nearly one billion dollars compared to 350 million dollars a year ago.
There was a time when the fluctuations in the stock exchange used to be directly co-related with the economic performance of the country. A growing and vibrant economy led to a boom in the stock exchange and vice versa. Though this may still largely be true, the health of the economy is not the only determining factor in the change in the market sentiment anymore.
Increased globalisation and integration of the world financial markets has widened the scope and range of groups and individuals looking for investment in equities anywhere in the world. As it is, ample liquidity, the world over, is creating a lot of demand for Asian emerging markets. This is so because of better macro-economic conditions in the region, leading to handsome growth of corporate earnings.
Pakistan, of course, is no exception. Last few years have witnessed a reasonably good progress on reforming the economy, a sustained healthy growth and some correction in macro-economic imbalances in the key areas of the economy. Above all, there is now no immediate threat of insolvency to the economy and foreigners feel pretty confident in respect of the safety of their funds because of a comfortable level of foreign exchange reserves.
The corporate earnings, particularly in the financial sector, have been excellent, prompting foreign investors to extend their activities particularly in this sector. The flow of liquidity in the stock exchange has also been facilitated as a result large-scale coverage of the market by foreign brokerage houses and the issuance of GDRs.
However, it needs to be stressed that the continuation of bull-run in the equity market can never be guaranteed. This is particularly true in the case of Pakistan where foreign investors holding a considerable chunk in the market cannot be relied upon as a permanent source of increasing investment. They could easily decide to ditch the country in case there are any unfavourable economic or political developments in the country.
We don't want to comment in detail on this aspect but would only like to say that there are still vulnerable areas of the economy and political developments are also somewhat worrisome at the moment. Even the issue of electricity shortage could be blown out of proportion for political reasons. The increasing demand for government control of the KESC could push back the privatisation process for many years.
Although there does not seem to be any reason to press the panic button at the moment, it would be advisable for the local investors to be very cautious in their approach, given a substantial presence of foreign investment in the market which could flow out of the country due to some negative developments. Nobody could, however, be absolutely certain about the future trend.