The conclusion of fiscal year 2010-11 on Thursday witnessed what market participants dubbed: the ‘artificial’ benchmark. KSE 100-share index, gained 29 per cent, including dividends, against last financial year. Terming FY11 a ‘depressing’ and ‘bad’ year for the volumes-starved capital market, the official and unofficial market participants demand the government to declare the KSE a “sick industry” immediately.
As for the volumes and turnover, Thursday June 30, last day of FY11, witnessed the benchmark 100-share index closing at 12,532 points, 2802 points or 28.79 per cent higher in comparison with 9,730 points of the last trading day of FY10. Market participants, including the brokers, investors and analysts, are concerned over fast eroding volumes and low turnover at KSE, once Asia’s most liquid equity market. Zafar Moti told Pakistan Today that during FY11 the volumes and rupee turnover at Karachi bourse declined extensively from 150 million to 70 million shares and Rs8 billion to Rs4.5 billion, respectively. This shows a contraction of 53.3 percent or 80 million shares and 43.7 per cent or Rs 3.5 billion in terms of volumes and turnover, respectively. “FY 11 was almost equivalent to FY10 with factors like higher inflation, interest rates and CGT eroding investments and volumes to a 9-year record low,” Moti said adding despite assurances from the Presidential Palace the government did not take serious measures on the CGT which was keeping individual investment at bay. “CGT, higher demand for margin and 2008 crash” are the three words, the elected director believes, today’s KSE could be summed up in. Zia A. Shaafi, a senior equity dealer at Pearl Securities, said a strong support and confidence of local investors in the local equity market was something one should rejoice over, amid prevailing recessionary times. “It shows our economy is strong with the market maintainable and not eroding,” Shaafi said. The absence of day traders, he said, was responsible for the low volumes at the Karachi bourse, a problem, he proposed, could be sorted out through introducing positives like clearing ambiguities from the CGT.
“In spite of this headline increase in index, there must be few investors who have made money as volumes declined by 40 per cent in FY11 to 9-year low and gains were led by illiquid stocks like Nestle and Unilever,” viewed Mohammad Sohail, CEO Topline Securities. The analyst said without Nestle, a consumer giant hardly owned by few investors, the index gain could be calculated at 21 per cent. “For a common investor market has increased by 21 and not 28.5 per cent,” Sohail further added. But, he said, the unfortunate fact about Nestle, which had become second largest stock in the KSE 100 basket after OGDC, was that no brokerage was ready to cover its stocks.The brokers and investors believe that the KSE 100-share index is ‘artificial’ and does not reflect actual performance of the stock market.“Yes it’s (benchmark) is artificial as it reflects working of the top 25 companies – minus these heavyweights and you would see the benchmark plunging to a level as low as 8,000 (points),” commented Zafar Moti, Director Karachi Stock Exchange (KSE) The senior investors at KSE see the withdrawal of share trading in the odd-lot mode as a basic reason for manipulation of the index. “If the benchmark is led by Nestle and Unilever then what are the other companies doing,” said Yakoob Habib. He said local equity market was performing well as compared to international markets, but the index was showing a lukewarm growth. “This is partly because you cannot make any adjustment in the 100 index on the basis of bonuses,” the investor said. Sohail also raises some serious questions about the unrepresentative benchmark and its resultant manipulation saying, “If someone buys (preferably when the market starts and there are hardly any sellers) one share (of Nestle) for Rs5000 then the so-called representative index will increase by 51 points thereby enhancing the market capitalisation by Rs12 billion.” This manipulation, the analyst observed, could send a wrong signal to the common investors who make their investment decisions in accordance with movement of the 100-share index.
It is demanded of the government to remove ambiguities like the ill—thought-out Capital Gains Tax (CGT), facilitate exit and entry from the stock exchanges, equate the prevailing ‘higher’ interest rate to Karachi Inter-Bank Offer Rate (KIBOR), curb the double-digit inflation, restore the odd-lot based share trading system and lastly lessen its ever-increasing budgetary borrowings from the banks to provide space to the growth-oriented private sector. The market participants dubbed the 29 percent gain as “nominal” which, they said, was led by the top heavy 25-award wining scrips and illiquid stocks like Nestle Pakistan and Unilever, the former contributing approximately 26 percent or 1800 points to the annual raise.
