It is feared that the once vibrant Karachi Stock Exchange (KSE) is set to lose its title of most liquid equity market of the region if the current trend of thin volumes continues to persist. According to analysts, the Karachi bourse that once traded an average of Rs 40 billion a day with Rs 28 billion in cash and Rs 12 billion in single stock futures is verging on losing out on its once famous slogan of most liquid market of Asia.
“Rs 40 billion a day was fairly average four years ago (during 2005 and 2008). This period also saw an all-time high volume of Rs 216 billion ($3.7 billion) a day on March 9, 2005,” viewed Topline Securities Chief Executive Officer Mohammed Sohail. And the ground reality, the analyst said, was that if recent trend of volumes continued it would take six months for the brokers, exchanges, investors and other market participants to see those volumes to surpass the record volume seen on one day on March 9.
“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. The Topline executive said the volume at KSE currently is as low as the level exhibited during 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,” he noted. During the last three days, the average traded value at KSE was Rs 1.7 billion (in cash, off and derivatives market) compared to average volume of approximately Rs 1.0 billion at the time when the market was practically closed down in September-November 2008 period.
In FY11, which is going to end on June 30, average volumes at KSE were Rs 4.0 billion in cash and Rs 0.5 billion in the futures market, down 43 percent from the last fiscal year. The analyst attributes this lackluster activity to the imposition of Capital Gains Tax (CGT) in July 2011 after a gap of more than three decades. “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 stressed.
This, he said, could be verified from the fact that individual share in total trading had been dragged down to an average of 44 percent from around 54 percent before the imposition of the tax. “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,” he underscored. Sohail also indicated his belief that the turnover velocity of the country was one of the lowest in Asia.
He stressed that in terms of turnover velocity, the volume divided by market cap that happens to be a better and relative measure of market depth, the country’s turnover velocity last month was 22 percent compared to an average of Asian markets of more than 100 percent. “Pakistan’s turnover velocity in 2003 was a record 490 percent compared to Asian average of 80 percent making it one of the most actively traded markets at that time,” the Topline CEO said.
The analyst expressed fear that the existing depressed level of activity at the country’s capital market posed serious implications for capital formation and the government’s long-term objective to raise funds through the capital markets.
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