Is Pakistan market closed?

Pakistan’s once vibrant and actively traded Karachi bourse that used to trade Rs40bn a day in cash (Rs28bn) and single stock futures (Rs12bn) on an average is on the verge of loosing its once famous slogan of most liquid market of Asia . This Rs40bn a day was ‘average’ of four years that is during 2005 and 2008. This period also saw an all time high volume of Rs216bn a day (US$3.7bn) on March 9, 2005.

According to the analyses of The Topline, the ground reality is that if recent trend of volumes continue it will take 6-months for brokers, exchanges, investors etc to see these volumes to surpass the record volume seen on one day on March 9, 2005. That is the revenue earned by the exchanges, brokers, government, etc on that particular day is now equal to revenue earned in 6 months.

Volumes are as low as when market floor was imposed

Interestingly the volume at Karachi market these days are as low as what investors used to trade when there was a three and a half month price floor in 2008. Though price discovery was an issue at the end of 2008 when regulators placed an infamous market floor, volumes in the off market were close to what it is now. That shows the depressing state through which local bourses are passing these days. In last 3 days average traded value at KSE was Rs1.7bn (in cash, off and derivatives market) compared to average volume of approx. Rs1bn at the time when market was practically closed down in Sep-Nov 2008 period.

CGT one of the main reason for low volumes

In FY11 which is coming to an end, the average volumes are Rs4.0bn in cash and Rs0.5bn in the futures market down 43% from FY10. The main reason for this lackluster activity is the imposition of CGT in July 2011 after a gap of more than 3 decades. Besides the fear of documentation, the complex computation method to arrive at the actual gain or loss is the major reason that has forced individual investors to leave the market. This can be verified from the fact that individual share in total trading has come to average 44% from around 54% before the imposition of CGT. And as a consequence of record low volumes many companies are deferring their plan to raise capital from the equity market evident by only one IPO in FY11 at the local bourse.

Turnover velocity one of the lowest in Asia

In terms of turnover velocity (volume divided by market cap) which is a better and relative measure of market depth, Pakistan’s turnover velocity last month was 22% compared to an average of Asian markets of more than 100%. Pakistan ’s turnover velocity in 2003 was at record 490% compared to Asian average of 80% making it one of the most actively traded markets at that time. These plummeting activities at capital markets have serious implications for capital formation and government’s objective to raise long term funds through the capital markets.