The Truths About
Pakistan's Over Active Stock Exchange
By
Amir Zia
KARACHI:
Few would have guessed on September 11, 2001 that the best-performing
stock market in the world over the next two years would be one
closest to the center of the US-led war on terror -- Pakistan.
Rising
Islamic militancy, constitutional deadlock and political tension
with India would usually have been enough on their own to drag
any market down. And most people would have predicted that the
September 11 attacks and the wars in Afghanistan and Iraq would
only worsen the outlook.
But
instead Pakistan's stock market has risen 266 percent, outperforming
neighboring Bombay, which rose 42 percent, and even Sri Lanka,
which jumped 177 percent after the end of a two-decade civil war.
Pakistan's
decision to help the United States in its war in Afghanistan and
the subsequent lifting of economic sanctions helped trigger an
economic rebound, with GDP growing 5.1 percent last financial
year and seen expanding 5.3 percent this year.
Another
big factor, ironically, has been a crackdown on money laundering
in the wake of the September 11 attacks. Designed to deprive terror
groups of funds, the restrictions have instead encouraged Pakistanis
abroad to repatriate funds through official channels to banks
and other institutions, who have in turn invested them in the
stock market as interest rates fell.
Remittances
almost doubled to $4.2 billion last financial year, helping boost
Pakistan's foreign exchange reserves to $11.5 billion by the end
of August.
"Political
risk is still great here and stability is fragile," said
Shuja Rizvi, head of institutional sales at Capital One Equities.
"But
the market has discounted these factors...our business had never
been better," he said.
Analysts
say the opposition's bitter row with military President Pervez
Musharraf, which has paralyzed parliament, and edgy relations
with nuclear rival India and western neighbor Afghanistan remain
concerns.
In
addition, hardline Islamists opposed to Pakistan's support for
the war on terror pose serious threats and have helped keep foreign
investors away.
"All
these should have been seen as big risk factors," said Rizvi.
"The whole system seems to be banking on just one individual
-- President Musharraf."
But
none of this has halted the inexorable rise of the Pakistani bourse.
Most investment in the market has been by locals accustomed to
such risks, explains Arshad Arif, research head at brokers Khadim
Ali Shah Bukhari.
Financial
institutions -- flush with cash from reduced government borrowing
and higher remittances -- have fueled the market rise, said Asif
Qureshi, research head at Global Securities.
Rizvi
said individual investors were also pouring in money because other
investment options, including National Savings Certificates, were
no longer attractive given low interest rates.
Analysts
say the Karachi Stock Exchange 100-share index, hovering at a
life high of more than 4,600 points, seems set to cross the 5,000
mark before the end of 2003.
The
KSE's overall value of around $15.6 billion makes it the region's
second-smallest market ahead of Sri Lanka's $4.5 billion, but
it is now just below the Philippines' market capitalization of
$16.8 billion.
Pakistan
is helped by having the highest average dividend yield in the
region of 6.1 percent, above India's 1.5 percent, Sri Lanka's
2.9 percent and Hong Kong's 4.0 percent.
"It
is probably the highest in Asia; that makes it attractive,"
said Mohammad Sohail, research head at Investcap Securities.
Share
turnover has almost doubled in recent months to an average of
350 million daily, forcing brokerages to hire new dealers and
researchers.
At
Capital One, which has doubled the number of its traders, the
pace is frantic with dealers holding three phones at once while
taking orders.
Brokers
say the bull run will continue as long as interest rates remain
low and investors lack alternative investment opportunities. It
is also relatively cheap. The Karachi market's price to historic
earnings multiple of 10.6 has jumped in the last year, but remains
below Bombay's 15.4 and Sri Lanka's 11.5.
However,
the market base remains narrow with a handful of stocks generating
most activity, meaning that prices are being inflated by too much
money chasing too few shares, analysts say.
"Barely
25 stocks of more than 700 listed companies account for 80 percent
of the trading volume," Qureshi said.
And
even among the top 25, the bulk of activity is confined to Pakistan
Telecommunication (PTCL) and Hub Power. PTCL has the highest index
weighting, of 21.51 percent. Hub Power, the second-largest company,
has a 5.48 percent share.
With
the private sector not coming up with fresh projects, the only
new listings expected are those of soon-to-be privatized state
energy firms Pakistan Petroleum Ltd and Oil and Gas Development
Corp.
"All
the key stocks are now overvalued and the market lacks depth,"
said Rizvi. "It needs new IPOs for the sustainability of
the current bullish trend." - Reuters
