KSE daily trade declines by 43 percent in fiscal year 2011: CGT, documentation fear blamed for plummet

The imposition of capital gains tax (CGT) on share trading and fear of documentation has forced the investors to leave the market and daily trade at Pakistan premier stock exchange has drastically declined by 43 per cent in FY11 as compared to FY10, analysts said. The share of individual investors has come down to 44 per cent from over 54 per cent before the imposition of CGT, they added.
"As a consequence of record low volumes many companies are deferring their plan to raise capital from the equity market evident by only one IPO in FY11 at the local bourse", Muhammad Sohail, leading analyst and CEO of Topline Securities said. "Pakistan's once vibrant and actively traded Karachi bourse that used to trade Rs 40 billion a day in cash and single stock futures Rs 12 billion on an average is on the verge of loosing its once famous slogan of most liquid market of Asia," he added.
He said that the Rs 40 billion a day was 'average' of four years during 2005 and 2008. This period also saw an all time high volume of Rs 216 billion a day ($3.7 billion) on March 9, 2005. And the ground reality is that if recent trend of volumes continue it will take six months for brokers, exchanges, investors etc to see these volumes to surpass the record volume seen on one day on March 9, 2005. That is the revenue earned by the exchanges, brokers, government; etc on that particular day is now equal to revenue earned in six months, he added.
Interestingly, he said, the volume at Karachi market these days are as low as what investors used to trade when there was a three and a half month price floor in 2008. Though price discovery was an issue at the end of 2008 when regulators placed an infamous market floor, volumes in the off market were close to what it is now. That shows the depressing state through which local bourses are passing these days. In last three days average traded value at KSE was Rs 1.7 billion (in cash, off and derivatives market) compared to average volume of approximately Rs one billion at the time when market was practically closed down in September-November 2008 period.
He was of the view that the CGT is one of the main reasons for low volumes at the local bourse. In FY11 which is coming to an end, the average volumes are Rs 4.0 billion in cash and Rs 0.5 billion in the futures market down 43 per cent against FY10. "The main reason for this lacklustre activity is the imposition of CGT in July FY 11 after a gap of more than three decades," he said. Besides the fear of documentation, the complex computation method to arrive at the actual gain or loss is the major reason that has forced individual investors to leave the market, he added. "This can be verified from the fact that individual share in total trading has come to average 44 per cent from around 54 per cent before the imposition of CGT," he said.
"In terms of turnover velocity (volume divided by market cap) which is a better and relative measure of market depth, Pakistan's turnover velocity last month was 22 percent as compared to an average of Asian markets of more than 100 percent", he said. Pakistan's turnover velocity in 2003 was at record 490 per cent as compared to Asian average of 80 per cent making it one of the most actively traded markets at that time. These plummeting activities at capital markets have serious implications for capital formation and government's objective to raise long term funds through the capital markets, he added.