The joke that is the KSE
Fault lines in Pakistan’s stock exchanges By Dilawar Hussain
KARACHI, Feb 18: Karachi Stock Exchange – Pakistan’s answer to Wall Street -has risen 17 per cent in less than two months this year and by a phenomenal 49 per cent since the winter of last year.
Into the fifth year of a superb performance, equities at KSE have fared better than most other regional markets. But while celebrating the good times that are rolling on, stakeholders ought to keep one eye on the fault lines, which could, if not taken care of, have the potential of transforming into outright fractures. The March 2005 crisis was a quake across one of those great fault lines: plugging of financing. Let’s examine some of the other fault lines:
KSE-100 INDEX IS FLAWED: Of the 100 shares in the index, as few as can be counted on finger tips of one hand can turn the tide one way or the other. Prominent are the Oil & Gas Exploration Companies (E&P stocks), which have 38 per cent weightage in the index. Oil & Gas Development Company Limited (OGDC); Pakistan Petroleum Limited (PPL) and Pakistan Oilfields (POL) rule the roost.
Here is a sample: During past week ended Friday, Feb 17, the KSE-100 index closed at its all-time high at 11,352 points, posting a gain of 300 points. But the credit went squarely to the three E&P companies: OGDC; PPL and POL, which contributed as many as 368 points to the index surge. Keeping those stocks aside, the market, overall had not risen, but plunged by 68 points.
If the index is flawed, one should scarcely be amazed by the deafening silence of the government; the corporate regulators and bigger stakeholders; it suits them all. The great anomaly in the composition of index that shows the market galloping when it is just trotting, makes the government comfortable as the world watches mercury rising in the barometer (stock market) so as to prove the 8 per cent plus growth in the economy; it suits the Securities and Exchange Commission of Pakistan (SECP), the chief regulator, for what else can be a clearer proof of the effectiveness of its reforms; it suits the Karachi Stock Exchange (KSE) for it reinforces their claim of being the “best performing stock market in the world”.
And of course it suits the stock broker fraternity for looking up at the index shoot through the roof, more and more investors would run up to the market to make a quick buck. It is not to cast doubts on the transparency of the index composition; just the methodology.
Generally speaking, KSE-100 is a market capitalization based index designed back in 1991. The entire world has changed since. For fairer display of market performance, it is essential to study global trends. The re-composition of index on free-float basis, has since long been on the agenda of the regulators and the sooner that gets introduced, the better. The important lesson learnt from the March 2005 crisis was that the rally was not broad-based and the index remained biased to one high cap stock.
LACK OF DEPTH: The bull-run at the local bourses had started at the beginning of 2002 when the benchmark KSE-100 Index was at 1,273 points. It is not to say that this addition of a staggering 10,000 points to the index in a little over four years is all the handiwork of a flawed index. Far from that. The equity values have individually seen sharp rise in prices. When the government offered a small portion of its holding in National Bank of Pakistan (NBP) at the par value of Rs10, three years ago, who would have thought that by Feb 17, 2006, the NBP stock would be trading at Rs273 - reflecting an incredible gain of 2,630 per cent! Such is the case with almost all listed stocks that are worth their while; most are now ‘fully or fairly priced’.
Improved economy; reforms; political stability and lately foreign investment ($444 million inflow till Feb this fiscal year), have all contributed to the market rally. But what next? Already too much money has begun to chase too few shares. It is imperative that the government step forward to increase the depth of the market. Privatization of big ticket companies: Pakistan Steel; Habib Bank; Wapda; PSO; the Sui twins; PPL and more of the stocks of already listed O&E companies could provide the necessary depth to the market. And let there be a bigger portion of the stake put up in IPOs, because in a market which is now worth $53 billion, divestment of shares worth as little as $700-$800m, is not of much significance.
REFORMS PROCESS: Demutualization; introduction of new products (options and derivatives); margin financing and others are on the list of second generation reforms. Of all of those, ‘demutualization’ looks to be the sticking point. Contrary to general belief, a senior stock broker, said: “Why should we be against demutualization; when that happens, we would be both brokers as well owners at the stock exchanges”. Valuation is surely in debate. But let knowledge and discussion precede introduction of a reform to make them successful.
Abolishing of COT system of financing, before banks were prepared for margin financing was a dumb move and had to be retracted. But is that not ingrained in our national psyche? To digress a bit, shortage of sugar would not have been a tormenting affair today, if the agricultural department had realized two years ago that growers were diverting from sugarcane to other crops and as a result shortfall would occur in years ahead.
CONFLICT OF REGULATORS: Regulators and regulatees have eternally been in conflict. A closer coordination and atmosphere of cooperation may results in a healthy change of habits. Decisions have to be taken carefully but quickly. Two months into 2006 and the SECP is yet to place four of its nominees on the board of stock exchanges.
Without a full board and a non-member chairman for the first time, the bourses would doubtless be handicapped to take important decisions. And at both the frontline regulator (KSE) and the apex regulator (SECP), competent staff is known to be in short supply. SECP is trudging ahead without the basic all four commissioners and at KSE, some key executives are missing.
PROTECTION OF SMALL INVESTORS: Many stocks are currently priced at considerably higher than ‘fair’ price. Small investors who continue to hold them, could burn their fingers as happened in March. It would be cruel to dismiss small investors and day-traders as ‘satta wallas’ because speculation —in measured quantity — is spice of stock trading. They give the markets the high volumes. Efforts at investor education need to be stepped up. But best of all, small investors need to be explained the benefits of entering the equity market through mutual funds.
As the industry is growing by leaps and bounds, new products keep coming on offer to suit individual needs. Some of them being, Balanced funds; Islamic Funds; Equity Funds; Income Funds; Closed-end funds and Funds of Funds.
KARACHI, Feb 18: Karachi Stock Exchange – Pakistan’s answer to Wall Street -has risen 17 per cent in less than two months this year and by a phenomenal 49 per cent since the winter of last year.
Into the fifth year of a superb performance, equities at KSE have fared better than most other regional markets. But while celebrating the good times that are rolling on, stakeholders ought to keep one eye on the fault lines, which could, if not taken care of, have the potential of transforming into outright fractures. The March 2005 crisis was a quake across one of those great fault lines: plugging of financing. Let’s examine some of the other fault lines:
KSE-100 INDEX IS FLAWED: Of the 100 shares in the index, as few as can be counted on finger tips of one hand can turn the tide one way or the other. Prominent are the Oil & Gas Exploration Companies (E&P stocks), which have 38 per cent weightage in the index. Oil & Gas Development Company Limited (OGDC); Pakistan Petroleum Limited (PPL) and Pakistan Oilfields (POL) rule the roost.
Here is a sample: During past week ended Friday, Feb 17, the KSE-100 index closed at its all-time high at 11,352 points, posting a gain of 300 points. But the credit went squarely to the three E&P companies: OGDC; PPL and POL, which contributed as many as 368 points to the index surge. Keeping those stocks aside, the market, overall had not risen, but plunged by 68 points.
If the index is flawed, one should scarcely be amazed by the deafening silence of the government; the corporate regulators and bigger stakeholders; it suits them all. The great anomaly in the composition of index that shows the market galloping when it is just trotting, makes the government comfortable as the world watches mercury rising in the barometer (stock market) so as to prove the 8 per cent plus growth in the economy; it suits the Securities and Exchange Commission of Pakistan (SECP), the chief regulator, for what else can be a clearer proof of the effectiveness of its reforms; it suits the Karachi Stock Exchange (KSE) for it reinforces their claim of being the “best performing stock market in the world”.
And of course it suits the stock broker fraternity for looking up at the index shoot through the roof, more and more investors would run up to the market to make a quick buck. It is not to cast doubts on the transparency of the index composition; just the methodology.
Generally speaking, KSE-100 is a market capitalization based index designed back in 1991. The entire world has changed since. For fairer display of market performance, it is essential to study global trends. The re-composition of index on free-float basis, has since long been on the agenda of the regulators and the sooner that gets introduced, the better. The important lesson learnt from the March 2005 crisis was that the rally was not broad-based and the index remained biased to one high cap stock.
LACK OF DEPTH: The bull-run at the local bourses had started at the beginning of 2002 when the benchmark KSE-100 Index was at 1,273 points. It is not to say that this addition of a staggering 10,000 points to the index in a little over four years is all the handiwork of a flawed index. Far from that. The equity values have individually seen sharp rise in prices. When the government offered a small portion of its holding in National Bank of Pakistan (NBP) at the par value of Rs10, three years ago, who would have thought that by Feb 17, 2006, the NBP stock would be trading at Rs273 - reflecting an incredible gain of 2,630 per cent! Such is the case with almost all listed stocks that are worth their while; most are now ‘fully or fairly priced’.
Improved economy; reforms; political stability and lately foreign investment ($444 million inflow till Feb this fiscal year), have all contributed to the market rally. But what next? Already too much money has begun to chase too few shares. It is imperative that the government step forward to increase the depth of the market. Privatization of big ticket companies: Pakistan Steel; Habib Bank; Wapda; PSO; the Sui twins; PPL and more of the stocks of already listed O&E companies could provide the necessary depth to the market. And let there be a bigger portion of the stake put up in IPOs, because in a market which is now worth $53 billion, divestment of shares worth as little as $700-$800m, is not of much significance.
REFORMS PROCESS: Demutualization; introduction of new products (options and derivatives); margin financing and others are on the list of second generation reforms. Of all of those, ‘demutualization’ looks to be the sticking point. Contrary to general belief, a senior stock broker, said: “Why should we be against demutualization; when that happens, we would be both brokers as well owners at the stock exchanges”. Valuation is surely in debate. But let knowledge and discussion precede introduction of a reform to make them successful.
Abolishing of COT system of financing, before banks were prepared for margin financing was a dumb move and had to be retracted. But is that not ingrained in our national psyche? To digress a bit, shortage of sugar would not have been a tormenting affair today, if the agricultural department had realized two years ago that growers were diverting from sugarcane to other crops and as a result shortfall would occur in years ahead.
CONFLICT OF REGULATORS: Regulators and regulatees have eternally been in conflict. A closer coordination and atmosphere of cooperation may results in a healthy change of habits. Decisions have to be taken carefully but quickly. Two months into 2006 and the SECP is yet to place four of its nominees on the board of stock exchanges.
Without a full board and a non-member chairman for the first time, the bourses would doubtless be handicapped to take important decisions. And at both the frontline regulator (KSE) and the apex regulator (SECP), competent staff is known to be in short supply. SECP is trudging ahead without the basic all four commissioners and at KSE, some key executives are missing.
PROTECTION OF SMALL INVESTORS: Many stocks are currently priced at considerably higher than ‘fair’ price. Small investors who continue to hold them, could burn their fingers as happened in March. It would be cruel to dismiss small investors and day-traders as ‘satta wallas’ because speculation —in measured quantity — is spice of stock trading. They give the markets the high volumes. Efforts at investor education need to be stepped up. But best of all, small investors need to be explained the benefits of entering the equity market through mutual funds.
As the industry is growing by leaps and bounds, new products keep coming on offer to suit individual needs. Some of them being, Balanced funds; Islamic Funds; Equity Funds; Income Funds; Closed-end funds and Funds of Funds.
posted by India News Watch at 8:50 PM
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