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Capital Markets 6 Capital Markets 6 Capital market is an important barometer of the During the period from July-March 2010-11, the health of an economy and important component of capital markets demonstrated wavering rising the financial sector. It is a vehicle whereby capital trend and posted modest gains. Total 638 is deployed from sources where it is in excess to companies were listed at the Karachi Stock the sources where it is in short supply. The capital Exchange (KSE) on July-March 2010-11 with market facilitates; (i) mobilization and total listed capital of Rs. 920.1 billion. Pakistan’s intermediation of private savings and (ii) stock markets have remained buoyant during the allocation of medium and long-term financial first two quarters of the 2010-11 in terms of resources for investment through a variety of debt market index and market capitalization, which and equity instruments of both private and public was remained steady till January 2011.The KSE sectors. It plays a crucial role in mobilizing witnessed a rise of 16 percent as compared to the domestic resources and in channelizing them corresponding period of 2009-10, and main reason efficiently to the most productive investments. An of this recovery is the absence of leverage efficient capital market can also provide a wide products for the stock market in addition to range of attractive opportunities for both the soaring inflation levels and rising interest rates. domestic and foreign investors. However, volumes gathered pace and the average volume increased by 19 percent to touch 114.2 The market oriented economic and investment million shares per day during the third quarter of policies being pursued for the last two decades or the 2010-11. more, created conducive environment for the capital markets in Pakistan. Market friendly Investment in capital market during the period measures introduced in the early 1990 such as July-March 2010-11 by the foreign investors privatization of various state owned depicted a net inflow of US$ 301.5 million, but enterprises/units and commercial banks, allowing noteworthy contribution was made during the first private sector to set-up commercial and two quarter of 2010-11. investment banks, and permission to foreign investors to buy and sell shares freely on the stock Equity Capital Market market with full repatriation facilities and Amidst challenging economic and social permission to own up to 100 percent equity in a environment because of security and after flood venture, served as catalyst in reviving the challenges, strong presence of foreign investment confidence in the country's stock market. After improved risk perception about strength and depth two decades, the aggregate market capitalization of the capital market which lure the investor and increased manifold and stood at Rs. 3,148 billion business community. Trading at FY12E Price by the end-March 2011 and market patched by Earning Ratio (PER) of 7.0x, Pakistan equities 15.2 percent more than last year, which transpire reflect 26 percent discount to historical mean of that Pakistan’s equity market is one of the best 9.5x and over 50 percent discount to regional performing equity markets in the world for almost comparable markets. Conversely put, Pakistan one decade. equities currently reflect forward earning yield of 14 percent compared to 6 percent for the region and 5 percent for India and China. Moreover, 77 Economic Survey 2010-11 excluding very few scripts, which are currently market is actually as cheap as 5x forward PER trading at premium valuations, the rest of the and 20 percent in terms of forward earning yield. Fig-6.1: Foreign Investment and KSE Index Foreign Portfolio Investment KSE Index 100 190 13000 140 12000 11000 90 10000 40 9000 Index KSE 100 KSE Million $ -10 8000 -60 7000 -110 6000 -160 5000 Jan-11 Jan-10 Jan-09 Oct-10 Oct-09 Feb-11 Sep-10 Feb-10 Feb-09 Apr-10 Apr-09 Dec-10 Dec-09 Mar-11 Mar-10 Mar-09 July-10 July-09 Nov-10 Aug-10 Aug-09 Nov-09 Sept-09 May-10 May-09 June-10 June-09 In fact, only few companies have driven the Global Equity Markets market and shown robust growth over the years The leading stock markets of the world observed with average annual Earning per Share (EPS) high growth during the fiscal year 2010-11 growth for the market clocking in at 21 percent ranging from 8.1 percent in Japan to the highest for the period 2003-10. Led by Energy and market return up to 66.8 percent as peace dividend Petroleum, banks and fertilizer sectors, bottom in Sri Lanka. As Table-1 demonstrates global line growth for 2010-11 is expected to even equity markets, witnessed a huge bullish trend as outperform the historical average and clock in at compared to last three years when most of the 24 percent. After 14 months of continuous foreign markets showed bearish trend with negative portfolio outflows, foreign investment turned market returns both in local and foreign positive for the first time in Jun09 –right after currencies. The Karachi Stock Market showed an Pakistan’s inclusion in Morgan Stanly Capital excellent performance as its market return remains International (MSCI) Frontier Markets. Since at 19.3 percent in terms of local currency in the then, Pakistan has witnessed increased net inflow period July-April 2010-11amidst deteriorating of foreign investment and foreign holding as a domestic macroeconomic conditions and political percentage of free float weighted market upheaval. Similarly in term of USD the return is capitalization now stands at an all time high of 33 20.7 percent compared to negative trend in last percent. After marking a bottom of 4,815 in Jan- three years. Main stock indices including US S&P 09, KSE100 has more than doubled and trading 500, UK FTSE 100 and Japanese Nikkei 224 also around 12,000 points in May, 2011. recorded improvement. Emerging equities of Sri Lanka witnessed a healthy growth of 66.8 percent During the period from July-March 2011, one in returns followed by South Korea and Australia company was allowed to offer for sale shares with 40.6 percent and 39.9 percent, respectively. worth Rs.1.1 billion of International Steel Limited Table-6.1 provides a quick snapshot of the return to the general public, high net worth individuals in terms of both domestic currency and USD for and the institutional investors through book these markets. building process. 78 Capital Markets Table 6.1: Performance of Global Stock Markets Y-O-Y INDEX CURRENCY 2009-10 (local currency) (local currency v/s US$) Market Return (%) S. No. COUNTRY STOCK NAME Local USD 30-Jun-10 19-Apr-11 30-Jun-10 19-Apr-11 Currency Dollars (in %) (in %) 1 Pakistan KSE 100 9,721.9 11,599.3 85.6 84.6 19.3 20.7 2 India Sensex 30 17,700.9 19,121.8 46.4 44.5 8.0 12.8 3 Indonesia Jakarta Composite 2,913.7 3,732.7 9,065.0 8,700.9 28.1 33.5 4 Taiwan Taiwan Weighted 7,329.4 8,638.6 32.3 29.1 17.9 30.8 5 South Korea Seoul Composite 1,698.3 2,122.7 1,221.9 1,086.4 25.0 40.6 6 Hong Kong Hang Seng 20,129.0 23,520.6 7.8 7.8 16.8 17.1 7 Malaysia KLSE Composite 1,314.0 1,521.5 3.2 3.0 15.8 24.1 8 Japan Nikkei 224 9,382.6 9,441.0 88.5 82.4 0.6 8.1 9 Singapore strait times 2,835.5 3,125.4 1.4 1.3 10.2 23.6 12 Srilanka All Shares 4,612.5 7,475.2 113.6 110.4 62.1 66.8 13 China Shanghai Composite 2,398.4 3,057.3 6.8 6.5 27.5 32.6 14 Philippines PSE Composite 3,372.7 4,245.2 46.4 43.3 25.9 34.7 15 Australia All Ordinaries 4,324.8 4,874.3 1.2 0.9 12.7 39.9 16 US S & P 500 1,030.7 1,312.6 - - 27.4 12.1 17 UK FTSE 100 4,916.9 5,896.9 0.7 0.6 19.9 31.5 18 New Zealand NZSE 50 2,972.1 3,440.0 1.5 1.3 15.7 32.1 Source: Invisor Securities Reading the data · In 2009-10 the KSE-100 market return was 36 percent in local currency and 29.2 percent in USD terms. · Since July-01 to 19th April, 2010-11, the KSE-100 market has yielded returns of 19.3 percent. Performance of Karachi Stock Exchange trading around 12,000 at the end of December 2010. The KSE- 100 index however, remained In the current fiscal year, the Karachi Stock steady during the third quarter of 2010-11 and Exchange (KSE) retained its prominent position in after touching at 12,682 on January 17, 2011 and Pakistan’s capital markets, offering efficient, fair now trading at 11,900 points. The main reason of and transparent way of trading securities. This can better performance in mid May 2011 in the stock be compared with any market in the region and market and gearing up the momentum in the KSE- enjoying full confidence of the investors. Thus in 100 is considerable foreign investment in the the light of its leading role, the discussion on capital market.
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