The concluding fiscal year is widely perceived to be another bad year for the country’s capital markets where trading activity has slumped to a nine year low.
The buying and selling of shares, the floating of new companies and fundraising through issuance of right shares all remained depressed during FY11, ‘a year not to remember’.
Worsening market conditions kept the issuers of initial public offerings (IPOs) at bay as only three IPOs hit the local bourse in FY11 against the annual average of seven during the last decade and an annual average of 30 in 1990s. “It was another bad year for Pakistan capital markets as activities in the local bourses plunged to 9 year low,” Mohammed Sohail of Topline Securities stated.
Major contributing factors being cited for the downturn include the deteriorating security situation, economic slowdown, higher interest rates and the Capital Gains Tax (CGT). “As a result of this uncertainty, the individual investors have been leaving the market,” Sohail underlined.
The unpopular and ill-planned CGT is said to have played havoc with the volumes, particularly in terms of individual investment, at the Karachi bourse where the taxpayers always found it almost impossible to correctly total their capital gains on the basis of CGT’s “cumbersome calculations”. “(The) leading market players remained concerned about the re-introduction of Capital Gain Tax (CGT) after a gap of more than three decades, its understanding and the cumbersome calculations entailed,” the analyst said.
He went on to say that the government had failed to realise that they had killed the market by imposing this difficult-to-calculate levy on individuals, excluding sponsors who hardly trade, whose share is less than 10 percent in the total market capitalisation.
“This is despite the fact that the retail segment contributes positively in overall market activity and price discovery,” Sohail lamented. Resultantly, the analysts said, the equity market saw volumes as low as in 2002 when the size of the local market was small and post-9/11 uncertainties had shaken investor confidence. It was underscored that the average daily volumes in the cash and futures market of Rs4.4 billion ($51 million) a day in the concluding FY11 was down 40 percent from FY10.
This, they said, was mainly led by the absence of big market players on account of their specific issues and individual concerns on the new tax. “These low volumes were last seen in FY02 when the market size was small and was faced with the 9/11 events,” said Sohail. He acknowledged that in terms of volumes, Pakistan’s once highly-active market had gone back by nine years. And if the volumes at KSE are compared with that of fiscal year 2002 in relative terms the situation was more depressing.
“In FY02 the average market size was Rs358 billion ($5.8 billion) as compared to Rs3 trillion ($35 billion) average market cap in FY11,” the analyst said. Another shameful thing to mention, the analyst stated, was that Pakistan was lagging far behind the Bangladesh market that was in the initial stage of capital market reforms. “The Dhaka bourse traded US$180 million a day last year compared to $51 million seen at Karachi,” the analyst said.
