The stock market is one of the barometers of the economy of a country. The Pakistan Stock Exchange (PSX) is playing an important role in helping to extricate the economy from the challenges that it currently faces. It has the potential to aid the government’s efforts to jump start the economy.
The government has taken effective measures to bring about economic recovery after the damage inflicted by lockdowns after the pandemic. However, in order to bolster this process, PSX can play a role at the corporate and industry level by aiding the process of industrialisation and helping companies raise capital for diversification of products or for expansion.
Coping with COVID-19 is a challenge for the entire world. Global markets witnessed huge upheavals due to the pandemic. However, the local bourse averted the crisis in the first phase of Covid. To discuss current developments, Narratives talked to PSX Managing Director and Chief Executive Officer, Farrukh H. Khan about PSX in the post-Covid era.
How do you see Pakistani stocks performing in 2021?
While I am not in a position to comment on the trend that will be followed by the stock market, I will say this much, that if the economy continues to perform well, in line with the path and direction that the government has adopted, then we will see further improvements in the current account deficit, trade deficit, exports, dollar-rupee parity, interest rates and other economic indicators. There is no reason why this will not be reflected in the stock market with a positive trend showing in the market. That said, of course there are issues affecting the economy such as inflation and circular debt, to name a few, which can exert pressure on the market in the upcoming year. I would also like to highlight that PSX and the Securities & Exchange Commission of Pakistan (SECP) have taken various measures to improve the liquidity, ease of operations and robustness of the market. All these should improve investor confidence and bode well for the market.
Which companies or sectors are likely to be the sentiment drivers in 2021?
The sectors which can perform better would be those which take into account and leverage the positive steps and initiatives taken by the government to improve the overall economic scenario, like those related to the construction sector. This will result in better performance of individual companies and have a positive impact on the overall sector or industry related to those companies.
What are the concerns as the country enters 2021?
I think that the economy is essentially on the right path and moving in the correct direction. However, some matters pertaining to the economy are a matter of concern for the overall wellbeing of the country. We have a high circular debt which is burdening the economy. Then there is the issue of inflation which needs to be controlled vigorously. I believe this needs to be done by taking measures on the supply side rather than on the demand side, by raising interest rates. We need to increase exports significantly to have a sustainable balance of payments. Finally, we need to enlarge our tax base considerably to make the tax system fair and generate enough revenue to reduce our budget deficits and be able to invest in necessary infrastructure development. These are major issues affecting our economy and I hope that these matters will be resolved with proactive steps taken by the government at the policy level and implemented by the private sector, including corporate sector and industry at the implementation level.
What are the economic challenges for the capital market?
One of the barometers of the economy of a country is its stock market. When the economy is doing well, it is reflected by the stock market performing well. A well-performing economy translates into good performance of the corporate sector and industry. An overall positive performance of the corporate sector and industry includes strong financial results with healthy payouts and greater shareholder value for shareholders and investors. On the other hand, when the economy is under-performing, it brings forth an overall challenging situation in the corporate sector, which in turn results in weaker performance of the stock market.
Pakistan’s capital markets can provide an ideal platform to the government and its economic team to utilise the potential of the stock market to accelerate the progress of the economy on a fast track
In other words, the performance of the stock market is inextricably linked to that of the economy and the corporate sector. The economic challenges faced by Pakistan on account of global and local factors such as interest rate, inflation, current account deficit, fiscal deficit, trade deficit, foreign exchange reserves, and rupee-dollar parity, amongst other factors, affect corporate and industrial activity in the country and that influences investor confidence and performance of the capital market.
It should also be kept in mind that markets are always forward looking and anticipating the future performance of the economy and the corporate sector.
What is the long-term outlook for the capital market, considering present economic challenges?
PSX aims to play an important role in helping to extricate the economy from the current challenges that it faces. Pakistan’s capital markets can provide an ideal platform to the government and its economic team to utilise the potential of the stock market to accelerate the progress of the economy on a fast track. As it is, the current economic and financial team of the government has already shifted gears to steer the economy on the path of recovery; however in order to bolster this process, the PSX can play a role at not only the government level but also at the corporate and industry level by aiding the process of industrialisation and helping companies raise capital through equity or debt issuance for capital expenditure, meeting working capital needs, diversification of products or for expansion. It can also help the government to raise much needed capital through issuance of debt, for example, to address the issue of the circular debt or to meet infrastructure development expenditure. Furthermore, potential investors, whether they are high net worth individuals or corporations, pension funds, asset management companies (AMCs) and other market entities, can all work together and leverage the platform of the PSX to invest in attractive investment opportunities.
PSX is consistently making efforts to improve and upgrade its technological systems, operational capacities and risk management functions. It is working closely with the SECP to amend, improve and enhance its regulatory framework, to bringing in policies that are in line and synchronised with the evolving economic environment and the changing/developing requirements of the capital market.
The PSX is striving to bring in depth and liquidity in the market by increasing its outreach and by inviting the banking sector and other stakeholders such as investment banks and AMCs to work with the Exchange. One of the positive results of reaching out to these market entities is the inclusion of a bank (Bank Alfalah), which has become the first bank to be designated as market maker for debt securities on the Exchange. Moreover, banks can now actively participate in the issuer landscape through the Growth Enterprise Market (GEM) Board and can thus play their role on the equity side as well.
PSX is reaching out to different market entities such as banks, investment banks and consultants to the Issue, whereby some of these entities have already shown interest in taking part in adding depth and liquidity to the capital market. Hence we have already seen a strong Initial Public Offering (IPO) pipeline this year.
Recently, to help increase the number of investors in the market, we have worked with the SECP to introduce regulations that will allow complete and seamless online account opening, while also making other regulations easier.
Hence PSX is building a strong momentum on both the demand and supply side. So, Pakistan’s capital market is poised for further growth, progress and prosperity for all its stakeholders, including investors and issuers.
What are the rationales for optimism related to stock market growth?
As the economic revival is underway with several steps and initiatives taken by the government in general and the Ministry of Finance in particular, the SECP, and the State Bank of Pakistan (SBP), a boost has been given to investor confidence and has raised potential issuer interest in the capital market. Especially with steps such as decreasing of policy rate by the SBP, much impetus has been provided to the market. Investor funds are now being redirected to the market with the reduction in discount rates. At the same time, listed companies and corporations which rely on a combination of equity and debt, have had their debt servicing costs reduced, which has resulted in improvement of their bottomlines. This has, in turn, added to the shareholder value. All these developments have brought about optimism and positivity in the stock market.
While some other markets had closed down during the Covid pandemic, PSX continued to function without any break which helped instil investor confidence, whether they were local investors or foreign investors.
On the internal level, the Stock Exchange’s continuous improvement on its operational, technological, regulatory and risk-management capacities has led to the Exchange emerging as an even stronger, robust and resilient marketplace which has proven itself to be continuously and successfully functioning for all its stakeholders despite all challenges faced, whether they are brought about by the economic situation or by natural calamities such as the COVID-19 pandemic or the thunderstorms that ravaged the city. While some other markets had closed down during the Covid pandemic and the ensuing lockdown, PSX continued to function without any break which helped instil investor confidence, whether they were local investors or foreign investors. Moreover, the brokerage firms and the broker member community, who are an important part of the capital market’s ecosystem and who form the vital link of bringing business to the capital market, also played a key role in inspiring confidence in Pakistan’s stock market. These are all significant reasons for optimism in Pakistan’s stock market.
Is the stock market ready to face the second wave of COVID-19?
We are actually in the second wave of the coronavirus pandemic. The stock market has stood its ground and performed well throughout this period. While business continuity measures have been fully in place at the Exchange, the online trading facilities provided by many brokerage houses have helped to ensure the investors’ continued interest and activity in the market. The SECP has recently provided online account opening facilities for those who do not have easy and ready access to physically open a brokerage account. This will also add impetus to the market and ensure further interest on the part of investors.
It is pertinent to mention that the PSX is well prepared to ride the second corona virus wave as all SOPs are being enforced at the Exchange, work from home facility has been provided to all employees and staff, footfall has been reduced, hand sanitisers installed and technological platforms tested for business continuity to take place successfully at the Exchange. So yes, we are ready.
What are the lessons learnt in the first phase of Covid?
PSX and all its staff, employees, and management put in twice the effort required to not only survive through the pandemic but to also flourish and deliver the services despite the challenge of the pandemic. PSX learnt to be steadfast and robust and face up to the challenge of the pandemic. This is the reason that all processes and systems were in place and business continuity took place successfully at the Exchange despite the COVID-19 challenge and that of the accompanying lockdown.
With the installation of the new world class trading and surveillance system in March 2021, PSX will be able to provide an even more robust, transparent and international standard trading system for issuers and investors
One of the main lessons learnt was that we can successfully face such a calamity only by close collaboration and working together. PSX, our associated companies, National Clearing Company of Pakistan (NCCPL), Central Depository Company (CDC), brokers, and SECP, all worked together to deliver success.
Is the investment climate attractive for foreign investors?
If we look at the last decade, the stock market has offered the highest returns from amongst other asset classes in Pakistan such as bank deposits, gold, National Saving Schemes (NSS) etc. Furthermore, the KSE-100 Index has offered an annual return of 7.25 percent as against a return of 2.94 percent offered by the Morgan Stanley Capital International (MSCI) Emerging Markets Index in USD terms over the last 10 years. Also, in comparison with other regional markets, PSX delivered better performance in terms of Dividend Yield over the last one year. Specifically, if we compare with a regional market such as that of India, Pakistan’s capital markets have offered higher returns in USD terms over the last 10-year period, higher Earnings Per Share (EPS) growth in USD terms over the last 10 years and more attractive valuations with lower Price-to-Earnings (P/E) ratios in 10 years as compared to India’s capital market. This was also quoted in the tweets by Mattias Martinsson of Tundra Fonder, the Sweden-based frontier markets AMC. It is but a small wonder that today Pakistan’s stock market stands tall as the best performing market in Asia and the 4th best performing market in the world in September 2020, as rated by marketcurrentswealthnet.com, the New York-based global financial markets research firm.
More specific to PSX, with the installation of the new world class trading and surveillance system in March 2021, PSX will be able to provide an even more robust, transparent and international standard trading system for issuers and investors. This will also enable us to introduce new products like stock options and index futures, which are attractive for investors.
Is the stock market satisfied with the regulatory environment to attract investment?
Because the economic landscape and the global investment scenario is ever-evolving and in a constant state of improvement, hence our regulatory environment is also evolving with the changing requirements to facilitate all participants of the capital market such as investors, issuers and brokers etc. Working in partnership with the SECP, PSX continuously strives to upgrade and improve upon its regulatory framework to bring about policies which match the evolving requirements of the capital market and meet the expectations of all stakeholders who are there to be facilitated by PSX which has the vision to be at par with the best exchanges in the world.