The KSE market capitalisation in the country in terms of GDP is low as compared with some of the developed countries' bourses, while in terms of turnover it is one of the highest in the world mainly because of availability of badla financing. The State Bank of Pakistan in its financial market review released on Wednesday said that an international comparison of market capitalization to GDP ratio shows that while Pakistan's ratio has steadily increased in recent years, it remains significantly lower than other countries, such as India, UK, USA, Japan, Singapore, China and Hong Kong.
The bank further said that it is also interesting to note the sharp contrast between Pakistan's capitalization ratio (which is low) and the turnover ratio (which is one of the highest in the world).
This characteristic, which Pakistan shares with India, probably reflects the large speculative element in these markets, which is aided by the availability of badla financing.
The traded value, as percent of market capitalization, reflects the trading activity in the stock market. Countries like Argentina, which were hit by financial crisis and political unrest, witnessed very low traded value as percentage of capitalization.
Pakistan, on the other hand, experienced a decreasing trend of traded value, from 251.9 percent of capitalization in CY02, to 40.1 percent in CY03, which probably owed significantly to the sharp rise of KSE-100 as well as the listing of large government-owned companies.
The performance of Karachi equity market was also fairly remarkable in comparison with global equity markets. However, it should be noted that this comparison is based on Morgan Stanley Composite Index, which is a free-float weighted equity index of world stock markets, and is only indicative of the performance of the KSE-100.
It may be pointed out that the fall in world stock markets after CY00 was mainly attributable to the collapse of the information technology bubble. However, the simultaneous decline in the equity market in Pakistan was unrelated with this trend.
The salient feature of FY04 was 16 Public Offerings amounting to Rs 55.6 billion. Such a large number of new issues and mobilisation had not taken place for some years. Investor-appetite was so strong that most of these issues were heavily oversubscribed.
The other positive outcome was strong growth in corporate earnings: average earning growth in FY04 was 26.5 percent. All these positive developments are captured in the momentum of the extended 2-year rally, which continued into FY04, with the benchmark index (the KSE-100) rising to a new all-time high of 5620.6 in April 2004 before surrendering a fraction of its gains by end-June 2004.
In annual terms, the KSE-100 Index, thus registered a YoY growth of 54 percent in FY04 which is quite extraordinary, given that it had already seen a 92.2 percent rise in FY03.
The impact of the extended market rally on the KSE market capitalisation was augmented by additional listings (particularly of OGDC). Specifically, market capitalisation of KSE rose by an impressive 49.5 percent, increasing its share in GDP to over 26 percent from 19.7 percent at the end of the preceding year.
In fact, the new listed capital showed an addition of Rs 55.6 billion during FY04, which was far greater than Rs 13.8 billion added during the preceding three years. Not surprisingly, given the increased market activity, market liquidity also improved during FY04, with the average daily trading volume jumping by 25.9 percent, compared to FY03.
The increase in the KSE-100 index was driven primarily due to improvements in economic fundamentals. The low prevailing interest rate continued to drive non-bank corporate earnings, both directly (by reducing financing costs) and indirectly (by spurring demand in the broader economy, and thus corporate profitability).
Similarly, low interest rates also added substantially to the profitability of banks, through increased credit off-take as well as capital gains on their long-term bond holdings.
An additional factor affecting the market sentiment was public offerings of a number of government owned companies. The offer price was set at a discount to the assessed 'fair price' value, probably as a part of government strategy to increase the investor base.
The offerings attracted substantial investments, particularly as investors' interest was already whetted by the sustained rise in equity prices in the past months.
The positive sentiment was reinforced by developments on the political front including the improvement in relations with India, recognition of Pakistan as Non-Nato ally by USA, resolution of Legal Framework Order (LFO) issue, etc.
However, the market could not maintain the upward momentum towards the end of the fiscal year mainly due to deteriorating law & order situation in the country and the announcement of Capital Value Tax (CVT) in the Federal Budget for FY05. Consequently, the market volumes and turnover started falling from May 2004 onwards.
Later in September, the unexpected change in the transition plan, aimed at replacing badla with margin financing for details, kept the market under tremendous selling pressure. However, the market recovered some of the losses following encouraging results of some corporate entities.
The strong rise in the equity market, together with the continuation of low returns on alternative investments naturally also spurred the development of the mutual funds industry; FY04 saw the addition of three new closed-end mutual funds, with total assets under management nearly doubling in FY04 to Rs 97.3 billion.
The performance of corporate debt market, on the other hand, remained subdued, largely due to low interest rate environment. The market witnessed the issue of only six new listed debt instruments (valuing Rs 3.3 billion) during FY04 compared to 15 instruments (Rs 6.2 billion) in the preceding year.
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