The outgoing calendar year saw phenomenal returns for investors in the country's equity markets. CY'14 was the third consecutive year in which the Karachi Stock Exchange and other local bourses saw equity prices surge across the board in double-digit percentages. But even as the equity markets have provided stellar gains to investors, the number of new entrants to the market; particularly retail investors, has failed to register any significant increase.
In a recent interview with BR Research, Farid Alam the Chief Executive Officer of AKD Securities lamented that the previous three years provided a strong opportunity for individuals to commence investments in equity markets yet few new entrants made that leap.
He opined that responsibility for the dismal expansion in the investor base falls squarely on the stock exchanges and their members as well as regulators. "The brokerage houses and the exchanges have not made any meaningful progress in creating awareness and generating interest among the broader population despite exceptional performance of local equities", he said.
The Securities and Exchange Commission of Pakistan has also not made any mentionable strides in this realm. "It all boils down to encouraging a culture of savings in this country which is direly needed" he remarked. Alam explained that in order to boost participation of individual investors in capital markets, the regulator has to entice them through a host of possible incentives.
"You can set a limit for defining small investors and offer some sort of relaxation on capital gains tax to that segment of investors, or they may be given some preference in the purchase of treasury bills and other fixed income securities", he suggested. These incentives can have a sunset clause just so that individuals have an opportunity to experience these investment avenues. In his view, "know your client" rules are also a detriment for individuals just as they are a detriment for companies that are craving capital injections.
"There are about 37 million bank deposit holders in the country. If even one percent of these are routed towards the capital markets, that would double the number of investors", he said highlighting the potential gains that could result and the depth that could be added to the domestic bourses. "Right now the banks and financial institutions still have a hegemony over government securities and a lack of other viable investment avenues also lets them dictate the cost of funds" he said, explaining that easier access to trade of government securities will also prove extremely beneficial for the government in the medium to long term.
Quizzed regarding the upcoming Monetary Policy Statement by the central bank, Alam contended that the market "has priced in a discount rate of 100 basis points; anything above or below that would be a trigger". He highlighted that SBP has never introduced a rate cut of more than 100 basis points while the discount rate was below 10 percent, making such a move unlikely in the upcoming MPS announcement. However, regardless of the quantum of the rate cut, "the discount rate should come down and continue to go down in coming months given nose-diving inflation".
When asked which sectors would likely lead the market in terms of gains in coming weeks, Farid Alam asserted, "Companies that offer regular dividends will continue to lead in terms of investors' interest". He pointed out that while company fundamentals play a part in driving investment decisions, "general expectations about the state and future of the economy are the major considerations among investors".
The chief executive expects pressure on oil stocks from falling international prices to be short-lived. He also foresees minimal negative impact of falling commodity prices on commodity stocks. "Although domestic prices of commodities fall in tandem with international prices, prices of products that are based on these materials remain sticky. Hence these manufacturers are actually in for windfall gains."
In theory, declining interest rates should squeeze banking spreads. While Alam expects the bank earnings to stand firm despite lower rates, he believes "there is a strong perception that banks will under perform as rates go down". He highlighted that the banking sector has not rallied although some individual stocks have posted gains, adding that a strong rally in the sector is not likely in the near future. "There are five initial public offerings in the pipeline with us," he informed, adding that market conditions are enticing companies into listing. He also remarked that foreign investors' interest remains strong and inflows are continuing.