Nida Jaffery
The Pakistan Stock Exchange has finally stopped to take a breather midweek, however, analysts believe the correction was long-due and will not last much longer. The Benchmark KSE-100 Share Index started the week journeying towards north and breached 47,000 mark during the first two days. However, midweek crises struck the bourse hard and it closed at 46,634 points or 0.1pc.
The week remained an eventful one as The Pakistan Stock Exchange sold 40pc strategic stake to a Chinese consortium at an amount of Rs 8.9 billion or $85.5 million, translating to Rs 28 per share.
The Chinese consortium comprises of three Chinese exchanges: China Financial Futures Exchange Company Limited (lead bidder), Shanghai Stock Exchange and Shenzhen Stock Exchange, taking up 30pc of the strategic stock while two local financial institutions, Pak-China Investment Company Limited and Habib Bank Limited, took 5pc each.
What will the Chinese management bring to PSX?
The Pakistan Stock Exchange lags behind its regional peers in terms of products, technology and trading activity. It is believed that the new manager will take immediate steps to improve the operations of the local bourse.
A recent report by Insight Securities explained that the transition will result in improved general public confidence in the exchange as well as possibility of cross-listing/connect between PSX &SSE.
From the Chinese point of view, the presence of their own regulators would facilitate the Chinese companies which intend to acquire local companies. Further, the sales would improve local equity brokers’ liquidity and capital adequacy.
At present, the penetration of Pakistan Stock Market stands at a meager 0.2pc compared to 2pc in India, 8pc in Malaysia and 13pc in China. This is despite 40pc return in 2016, 27pc annual return in last 5 years and 22pc annual return since calendar year 2000. The low penetration could be partly blamed to lack of awareness, lack of trust over the exchange management, limited product portfolio and inherent inefficiencies.
Moreover, derivative instruments (futures, options, bonds and ETFs) increase market volatility. They are the major thrust behind large trading volumes. Lack of liquidity at PSX has been a major concern for foreign investors over the past decades due to fewer derivatives available at the exchange, where market has been unable to absorb foreign selloffs (PSX is 80pc cash market).
With the operational control going to Chinese companies, the analysts foresee different derivative instruments to be introduced at PSX, which would enhance liquidity and investor confidence in the market.
The sell-off of PSX is expected to be completed by mid-2017. The divestment committee will issue the Letter of Acceptance to the consortium, subject to formal approval of Securities and Exchange Commission of Pakistan (SECP).
As per the plan, the PSX will then offer another 20pc (160 million) shares to the general public within six months of the completion of acquisition. This will not only channel private foreign funding in Pakistan but also be the next big liquidity event after Pakistan’s reclassification to MSCI Emerging Market Index.
“At transaction price of Rs 28 per share, the 60pc sell off would inject $128 million in the brokers’ cash balances, resulting in higher capital adequacy and proprietary trading,” said Zeeshan Afzal, Head of Research at Insight Securities.
With Chinese consortium taking strategic stake in PSX, analysts expect new management to take immediate steps to widen product portfolio, to promote bond/derivative market and to improve efficiency through better regulations, oversight and technology.
Cross boundary investment channel scan also be made possible as in the case of Shanghai-Hong Kong connect, but it may take some time while the local regulators (including SBP) would also be concerned about the dollar outflow by investors.
Overall, with money coming in the market due to this sell-off and the reclassification of Pakistan in MSCI EM Index, the equity market will potentially generate a yield of 17pc to 21pc in CY17. A report by Arif Habib Corporation states that the benchmark equity market will rerate from price to earnings multiple of 9.1x to 9.7x in 2017.
