Karachi's Stock Exchange Defies Pessimists

By Steve Herman
Karachi
17 March 2008

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Volatile Pakistan does not, at first glance, seem to be attractive for those looking to invest money in a stock market. But the Karachi exchange has gained a reputation as one of the world's top performers. In recent weeks it has again been setting new highs for share prices. VOA Correspondent Steve Herman in Karachi visited the exchange which has been defying the global trend and the direction of Pakistan's economy.


Pakistani traders read newspapers as they sit beside the Karachi Stock Exchange's board, 02 Jan 2008
Most investors who follow the U.S. Dow Jones index, Japan's Nikkei or London's FTSE ("Footsie), likely pay little heed to the KSE 100. But those select issues on the Karachi Stock Exchange have been consistently outperforming those of the better-known bourses.

There are 200 member seats on the floor of the Karachi exchange, Pakistan's oldest and biggest stock market. Traders execute orders on computers terminals below a huge electronic board that would not be out of place on Wall Street.

The Karachi market has 650 listed companies with market capitalization totaling $70 billion. From an index below the 2,000 mark seven years ago, Karachi now hovers above the 15,000 level. After a plunge in reaction to former Pakistani Prime Minister Benazir Bhuto's assassination at the end of last year, the key index has since gained nine percent.

While political confusion, suicide bombers and economic woes dominate the front pages, the business sections of newspapers continue to report about the benchmark KSE 100 setting new record highs.


Nayab Fakhir Qazi, BMA Capital Equity Sales Vice President
BMA Capital equity sales vice president Nayab Fakhir Qazi explains that is because the price-to-earnings ratios of stocks on the Karachi exchange are a bargain.

"It's trading at very low multiples compared to India or China or other Asian countries. It's significantly attractive. We're seeing a multiple of 11.8 times for '08 earnings and less than 10 times on '09 earnings," said Qazi. "If you compare it to the regional PE's that's a discount of more than 25 percent."

For some, Pakistan may still be too risky when looking at the country's economic data. After all, inflation is rising and the current account deficit is burgeoning. Exports have stagnated.

Senior research analyst Khurran Schehzad at Invest Capital and Securities says many investors, however, prefer to look at the bright side.

"Profit, opportunities are immense here in Pakistan," said Schehzad. "So they are capitalizing on that, but gradually, as politics and society get settled."

And things are far from settled. A new, democratically-elected national assembly sitting for the first time (this week) could find itself fighting for control of the country with the unpopular President and former Army General Pervez Musharraf. Pakistan, after all, has a checkered history of civilian governments being pushed aside by military coupes.

The potential volatility makes betting on the Karachi exchange attractive to the most daring of international investors - those who run hedge funds.

Such funds seek significant short-term gains in the double digits but will typically make a quick exit if shares drop by ten percent or more.

BMA Capital's Qazi says speculators are not the only foreigners trading on Karachi's stock exchange.


"Well it's not only the hedge funds which are investing," she said. "We've seen a lot of foreign investment coming in to the banking sector, telecom sector, energy sector."

This is taking place at a time when overall net foreign investment in Pakistan is falling sharply - off one-third in the first half of this fiscal year.

On the floor of the Karachi stock exchange, one of its trading members, Muhammad Siddique Suleman, believes additional foreign investors will be hard to find because of the somber headlines.

"They are very afraid because they treat Pakistan as an extremist country, a terrorist country," he said. "There are also the suicide bombings going on. Therefore, in my opinion, they will be afraid to come."

But in another example of turning a handicap into an advantage, Qazi at BMA Capital says Pakistan's sluggish export picture means it has less to lose from a downturn in the U.S. economy, compared to other Asian markets, such as China and Japan.

"Only 12.5 percent of our exports go to the U.S. That is going to be positive for Pakistan from the perspective that we are more indigenous," she said. "Our consumption is locally driven."


Khurran Schehzad, Senior rRsearch Analyst at Invest Capital and Securities
And Schehzad of Invest Capital points out existing exports are primarily in the agricultural and textiles sector, which are hardly represented in the stock market.

"Oil, banking, cement and fertilizer - these are three or four sectors which constitute most of the volumes, most of the price increase in the market," he said. "From the agriculture sector, very few companies are there.

And that has helped cushion Pakistan's stock markets from the negative impact of record high oil prices.

Some who are critical of the hype surrounding the Karachi exchange contend the market is not all that liquid. Stock exchange member Suleman says the skeptics have a point.

"[It's] quite tightly held. Ninety percent of shares are held by the syndicate sponsors and the institutions. And 10 percent is with the public," he said. "In this 10 percent, four percent are owned by the big players of the stock exchange. Therefore, six percent liquidity is there."

A famous Pakistani economist (Mahbub ul-Haq) noted four decades ago that two-thirds of the country's wealth was in the hands of 20 or so players. But Invest Capital's Schehzad says the playing field has become more level since then.

"Since 2001 onwards the market float has increased, volumes have increased. This reflects that it is not being held by a few people, right? If your float is increasing, the market manipulation reduces," said Schehzad. "This has increased transparency. This has increased the number of hands holding the market. So this can be ruled out."

Now that the key Karachi index has surpassed the 15,000 level, the big question on the trading floor is how high can it go? Many respected analysts contend the robust market has yet to achieve its potential for the year and still could rise another 1,000 or 2,000 points. Such gains would certainly help Karachi keep intact its reputation as home to one of the world's best performing stock markets.