Pakistan’s booming market no black and white matter

With 49% returns in 2012,the Karachi Stock Exchange was one of the five best performing markets in the world

Written by Reuters | Published: April 11, 2013 12:51 am

Pakistan’s chaotic financial heart is home to 18 million people,Taliban bombers,contract killers — and one of the world’s most successful stock markets.

With 49 per cent returns in 2012,the Karachi Stock Exchange (KSE) was one of the five best performing markets in the world. Now it is seeking a foreign partner to buy a stake and take over management of a market that has risen three-fold over the past four years. At least some of that performance came on the back of a government amnesty that allowed people holding undeclared assets or “black money” to invest it freely in the market.

But government officials say the market’s success highlights the economic potential of the country. The market’s benchmark index continues to soar to record highs — up 10.34 per cent year to date. “Pakistan has a lot to offer investors and this is our chance to show it,” said Nadeem Naqvi,the KSE chairman. He plans to embark on a series of roadshows for potential foreign partners that will take him to London,Frankfurt and Hong Kong in the coming months.

Many of the companies listed on the KSE offer double-digit returns,low stock prices and resilient business models in this frontier market. The index still has an attractive price/earnings ratio of 8.50 despite the soaring returns of the past few years.

Pakistan now has a 4 per cent weighting in the MSCI Frontiers Market Index and has become somewhat of a discovery for foreign investors chasing new markets and yields. But the KSE’s spectacular rise last year can at least be partly attributed to another factor entirely — the cleansing of “black money”.

The market took off last year just as a government decree was finalised allowing people to buy stocks with no questions asked about the source of the cash. Average daily volume more than doubled last year to 173 million shares.

Authorities say the measure will bring undocumented funds into the tax net in a country where few pay taxes. But some critics decried it as a gift to corrupt officials and criminals seeking to launder dirty cash. “Politics and dirty money go hand in hand in Pakistan,” said Ikramul Haq,a Supreme Court lawyer. Interviews with regulators,brokers,market officials and analysts showed insider trading and manipulations are routine. Regulators have been largely ineffectual in controlling the shady practices.

The Securities and Exchange Commission of Pakistan (SECP) said it found 23 violations of securities laws that merited fines in fiscal year 2011-12 (April/March). The market regulator sent warning letters in another 19 cases,it said in its annual report. That’s a drop in the bucket,says Ashraf Tiwana,dismissed as head of SECP’s legal department after years of clashes with his bosses over fraud in the market.

The Karachi market’s small size and lack of liquidity make it vulnerable to manipulation. Market capitalisation is only $41.5 billion — the Bombay stock market’s capitalization is more than 10 times higher at $578 billion.

Only a quarter of the shares are freely floated — about 30 per cent of that is held by foreign funds and investors,including Franklin Templeton,Invesco Ltd,Goldman Sachs Asset Management and Mackenzie Financial Corporation. Since only 60 of KSE’s 600 listed companies trade regularly,small trades can rapidly make a big difference in a company’s share price.

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