The securities market is known as a market for long-term funds. It facilitates an efficient transfer of resources from savers to investors and becomes conduit for channelling investment funds from investors to borrowers.
The basic need of the securities market is to meet at least two basic requirements viz. (i) it should support industrialisation and corporate growth through savings mobilisation, investment fund allocation and maturity transformation and (ii) it should be safe and efficient in discharging the aforesaid function. Primarily, the securities markets help raising capital for businesses, mobilising savings for investment, facilitating corporations growth, profit sharing, corporate governance, creation of investment opportunities for small investors, facilitate government in capital-raising for development projects and it also known as a barometer of the economy.
The financing of economic development warrants two basic issues: first, how best to provide finances for the business sector-the engine of growth and second, how to monitor the behaviour and performance of corporate borrowers under an effective system of corporate governance. Publicly generated funds are essential for sustainable growth, especially when firms and economies are rapidly expanding. A fundamental choice for raising the funds is between a securities-market-based system and a bank-based-system of external finance. The choice of the system is very crucial in evolving a financial schemes and developing appropriate incentives. An active and vibrant securities market, offers positive real returns on a variety of financial instruments, provides an alternative investment opportunity selecting the best portfolio through diversification of risk according to investors' preferences. The banking sector can, however, react to compete this by offering alternative investment opportunities. Nevertheless, the securities market have an edge over the banking sector in that securities provide relatively liquid means of long term funds and its holder can liquidate the holdings at any time.
The securities markets all around the globe have played integral roles for developing the economies of the countries. The securities market in Pakistan, though much below the potential, has also played effective and dynamic role to support financial liberalisation, economic deregulation and privatisation of state owned enterprises in the last two decades. The macroeconomic reforms coupled with the stock market reforms have played a vital role for the economic development. The securities market has proved an effective vehicle for privatisation. As we have witnessed in the past that with the growth-oriented policies and attainment of some degree of economic and political stability, the market gains the confidence of domestic investors and foreign investors. As a result the market liquidity increases and risk-adjusted returns rise. The stable markets offers prospects of higher return with less volatility and the investors easily absorb new issues of stocks and corporate bonds and also lead to increased trading activity.
Generally there are few reasons for the lack of confidence on the part of individual investors in lackluster securities markets. First, there is a dearth of appropriate financial and other relevant information about the security market in general and listed securities in particular. Secondly, there is inadequacy of the accounting and auditing of financial reports. At times, there is the inability of the regulatory authorities to effectively monitor and supervise the market and protect investors against market manipulation and other market abuses. Normally for investors, fundamental analysis relies on long-term forecasts of the economy, the industry and the company's financial prospects to determine the fair value of the firm and thereby to select the stock for investment. This process is called the top-down approach since it goes from the macroeconomic environment viewpoint to the individual company. The most common developmental and institutional obstacles of emerging stock markets including the Pakistani stock market are small capitalisation in relation to GDP, limited liquidity in the market, and a less efficient regulatory framework. The natural consequences of such a situation are higher return required by the investors caused by higher uncertainty, higher transaction costs and fees etc. In addition, the usual problems associated with relatively thin market remains with the fact that prices are unduly influenced by the activities of a small number of dominant participants. The market capitalisation ratio, defined as the value of listed stocks divided by GDP, is used as a measure of stock market size. Pakistani stock markets have grown significantly during the last decade. Still, the size of the market is relatively small compared to other Asian markets. In Pakistan, the market capitalisation to GDP ratio is in range of 20% whereas in some emerging markets this ratio even crosses 100% which reveals that the role of Pakistan's securities market in the economy is quite below from potential.
The contribution of the securities markets to economic development represented by the ratio of new issues to gross investment is also very little in Pakistan for the past many years. Many of the constraints associated with equity markets are concerned with the overall development of the country and hence investment in securities remains a risky affairs for investors. Under the circumstances, securities market is restrained despite enthusiastic efforts for its rapid development. Some other dilemmas of Pakistan's stock markets are (i) Existence of only dealer-broker-members (no specialist/ market maker), (ii) Lack of diversity in products' availability in market and (iii) Lack of corporate governance - sponsor-owners are managing the firm with little professional management hired to run the affairs of the listed company. The inability of exchanges to lure small companies with low capital base for development of OTC market is another area of concern. No attempt has been seen so far to encourage the small and medium scale enterprises to raise capital through securities markets from any quarter.
The worst stock market crashes that occurred in 2005, 2006 and 2008 in Pakistan were mainly resulting as disastrous bubbles caused by unchecked investors euphoria and an absence of attention to the relation between stock price and economic and/or company fundamentals have evaporated the retail investors from our markets. In these testing times, the regulatory bodies concerned could not react timely and prudently with effective measures against undesirable developments. The stock market crash in 2008 has shaken the confidence of the investors. There is no denying the fact that the crux of the prevailing stock market problems is the chronic lack of investors' confidence in the system. A very small proportion of market capitalisation to the GDP, extremely small share of the population with a small proportion of equities in the total financial assets speaks volume about its vulnerable condition. Lack of liquidity and variety of trading instruments continues to be an important deterrent for diversification of portfolio. In such circumstances, the role of the Government, apex regulator, stock exchanges and financial intermediaries like investment banks, commercial banks, DFIs, insurance companies, mutual funds and NIT is inevitable in order to revitalise the securities market in order to put it on the right track so that it must play its due role for the economic growth of the country. Besides, there is an urgent need to address perception issues that has rattled the securities market. In order to enhance the demand side, creating awareness among the masses is a prerequisite by addressing transparency and risk issues and information dissemination so that public can make informed choices to save, borrow or invest. Through the process, general public will be empowered to change behaviour, however, timing of the series of educating public is very critical. On the supply side, the securities market must develop products that people demand and that match with their mood, social needs and belief. The exchanges must increase presentation at the grass root level by leveraging on communication and technology. Simultaneously, the government must discharge its role by attempting to address potentially conflicting economic goals consistent with sound securities regulations with lesser the fear of over regulations as liquidity attracts liquidity. The regulator should put market structure and securities dealing details into a simple and amenable language. The regulates will be more compliant if they know what is expected of them. The macro managing details of market operations are seldom useful rather they are often counterproductive.
The policy makers should also assess the idea of accessing foreign markets or trading in foreign securities and also evaluate whether it is desirable to foster domestic economic development or as an alternate explore the feasibility of alliance with other regional exchanges. Regulators should encourage competition and let competition figure out the parametric fundamentals. With all these growth oriented approaches, the securities market in Pakistan may find new heights in the time to come.