Pakistan: The Growing Pains of an Emerging Market

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The key dilemmas going through Pakistan’s fairness market — a small investor base, few new listings on the Pakistan Stock Exchange (PSX), and shrinking turnover — are tied to the dearth of belief amongst traders and issuers in addition to pointless compliance and tax burdens. It will take better professionalism among the many intermediaries and the rationalization of compliance and taxation by regulators and tax authorities to comprehend the market’s potential.

This was the central message to return out of the Pakistan Inc.! convention organized by the CFA Society of Pakistan on its 15th anniversary in Karachi final month. The convention introduced collectively 250 of Pakistan’s greatest minds and lots of extra on-line, amongst them funding managers, enterprise leaders, regulators, and authorized and accounting professionals, to debate how the nation’s capital market would possibly transfer ahead.

Too few traders are chasing too few shares.

With a market cap of round US $85 billion — lower than 30% of the nation’s roughly $300-billion GDP — Pakistan’s fairness market is simply too small to serve the nation’s financial savings and retirement wants and entice giant overseas traders.

Few corporations select to checklist on the alternate. In truth, the quantity of listed entities has declined through the years, from greater than 700 within the early 2ooos to lower than 600 at the moment. Among the listed corporations, many are illiquid or now not in operation. In 2017, there have been solely seven new listings regardless of a surprising bull run in 2016.

The advantages of itemizing would appear to be outweighed by the prices. In a reside digital ballot of the viewers, the bulk (63%) stated the regulatory and compliance burden was the crucial issue retaining companies from itemizing. When an organization inquires about it, “my advice is, ‘Do not list,’” stated Shabbar Zaidi, a distinguished accounting skilled.

The investor base in Pakistan is small. Liberal estimates recommend that there are solely half one million traders, regardless of Pakistan’s rising middles class and 208 million individuals. The market can be extremely concentrated, with 5,000 traders accounting for 90% of buying and selling, which is confined to solely about 30 shares.

Turnover is shrinking, so are the brokers.

In the early 2000s, the turnover velocity on the principle board was as much as 300%. Now it’s round 30%. In worldwide exchanges, a lot of the buying and selling has moved from money to derivatives segments, however not on the PSX. The effort to exchange conventional badla financing, a singular kind of repo financing, with derivatives has had little success.

The quantity of stockbrokers, at the moment round 225, is lowering each month. Commissions have been falling and prices growing.

Some of the most important brokers act extra like giant traders, financiers, and enterprise teams moderately than intermediaries. The partitions between their companies — brokerage, asset administration, actual sector corporations, and so on. — aren’t particularly thick and their monetary incentives don’t essentially favor market improvement.

Moreover, the inventory market has weathered main crises in 2000, 2002, 2005, and 2008. The broadly held notion is that the market is topic to manipulation and traders are weak to abuse.

Regaining rising market standing has been bittersweet.

In 2016, Pakistan’s inventory market soared after MSCI introduced that Pakistan would regain its standing as an rising market, a designation it had misplaced in 2008. Foreign traders held 1 / 4 of the market free float, in keeping with estimates, and the expectation of giant inflows from funds monitoring the MSCI Emerging Markets Index propelled the KSE-100 Index to its peak of 53,015.

But the jubilation quickly gave away to pensive reflection. Contrary to expectations, the market had skilled extra outflows than inflows as a result of the MSCI Emerging Markets Index gave Pakistan such a low weighting.

Political uncertainty weighs heavy in the marketplace.

Political turmoil has not helped Pakistan’s fairness market. The prime minister resigned after Pakistan’s Supreme Court disqualified him from office due to corruption, and the previous finance minister faces graft fees The credibility of the federal government has been drastically weakened.

A report commerce deficit and widening fiscal deficit have put stress on the Pakistani rupee, which is overvalued by 20% per IMF estimates. As the financial challenges mount, the robust financial management required to steer the nation is conspicuous by its absence.

After rising 46% in 2016, the KSE-100 index has fallen 25% from its all-time excessive. The market price-to-earnings ratio has slid right down to about 9, however worth traders are nonetheless not discovering the market engaging sufficient.

Taxation and compliance are choking the market.

The authorities have raised taxes on the capital market. Higher taxes on capital positive factors and dividends along with a presumptive tax on buying and selling are strangling the market. While the capital market is topic to in depth documentation and tax necessities, the true property sector just isn’t, so it’s arduous for the previous to compete for traders.

There are so many various circumstances, restrictions, periodic experiences, audits, inspections, and investigations by the Securities and Exchange Commission of Pakistan (SECP) that corporations and intermediaries can’t sustain. In a reside ballot, 59% of the viewers stated the capital market is overregulated. And amount has not equaled high quality: Regulations have executed little to enhance market notion or investor confidence.

“What we need is effective regulation, not more regulation,” stated Rahat Kaunain Hassan, a former chair of the Competition Commission of Pakistan.


Stock Market Index: Pakistan and Selected Emerging Markets
(3 January 2001 = 100)

Source: International Monetary Fund (IMF)


There has been progress. There are options.

Paul Smith, CFA, president and CEO of CFA Institute, informed delegates that the issues confronting Pakistan’s capital market aren’t distinctive and that the nation’s inner safety state of affairs is significantly better than the worldwide notion.

You Hang, who lately turned deputy managing director of PSX, highlighted latest progress in creating market infrastructure. Pakistan’s three inventory exchanges have merged to kind the PSX, which has efficiently demutualized and self-listed, with a consortium of Chinese exchanges — some of the most important on the earth — taking over a strategic fairness stake.

The viewers was not with out hope. In a reside ballot, 37% stated they anticipate Pakistan’s GDP development charge within the present fiscal yr to exceed final yr’s.

Investment managers pointed to robust development within the mutual fund sector the place giant home inflows have decreased the unfavorable impact of internet promoting by overseas traders. The market is at the moment bearish however it has however outperformed most regional markets.

The potential is large. A rising center class, facilitated by low inflation and financial institution credit score, is making its presence felt by means of report consumption. For instance, annual development in auto gross sales and auto loans is approaching 30%.

The authorities of Pakistan has taken daring steps to enhance safety and preserve regulation and order. The avenue crime plaguing the business hub of Karachi has fallen considerably. An bettering power state of affairs and decreased energy outages mixed with a younger inhabitants and mega initiatives beneath the China–Pakistan Economic Corridor are prone to gasoline financial development.

The Way Forward: Rationalization and Professionalism

After a full day of impassioned and candid discussions on the capital market points in Pakistan, three realizable options stood out. The tax authorities want to scale back taxes and the SECP must rationalize the compliance burden. At the identical time, practitioners should additionally aspire to increased requirements of professionalism and put the pursuits of their shoppers above their very own.

That’s what’s going to construct belief out there and that belief will kind the muse for sustainable development.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

Image courtesy of CFA Society Pakistan

Usman Hayat, CFA

Usman Hayat writes about sustainable, accountable, and impression investing and Islamic finance. He is the lead writer of “Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals,” and the literature overview, “Islamic Finance: Ethics, Concepts, Practice.” He is inquisitive about on-line studying and has directed three e-courses for CFA Institute: “ESG-100,” “Islamic Finance Quiz,” and “Residual Income Equity Valuation.” The different subjects he writes about are macroeconomics and behavioral finance. Previously, he was a content material director at CFA Institute. He is a former govt director on the Securities and Exchange Commission of Pakistan (SECP). He has expertise working in securities regulation and as an impartial advisor. His {qualifications} embody the CFA constitution, the FRM designation, an MBA, and an MA in Development Economics. His private pursuits are studying and climbing.



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