Volumes hit 80-week low at the onset of CGT regime

KARACHI: The market had an ominous start to the new fiscal year after volumes came crashing down and hit an 80-week low as July 1 marked the implementation of the Capital Gains Tax (CGT) on stock markets across the country.

The tax has been implemented despite confusion regarding its modalitities and protests by members of the stock market regarding the feasibility of the tax’s implementation.

The government rejected all suggestions by the management of the stock market and brokers and went ahead with the implementation as announced in the budget for the fiscal year 2010-11. Finance Minister Dr Abdul Hafeez Shaikh confirmed earlier in the week that the tax will be applicable on shares purchased on or before June 30, further hurting investors’ sentiments.

With the CGT in place, all shares will be taxed 10 per cent if sold within 6 months of the date of purchase and 7.5 per cent if sold between 6 months and 12 months. No CGT will be charged on shares held for more than a year.

The week started off on a dull note and the benchmark KSE-100 index dropped sharply by 125 points on Monday on lacklustre volumes of 81m shares. Volumes averaged 72 million shares for the first three days of the week, before crashing to 21 million shares on July 1 and 22 million shares the following day, the lowest since the market floor was removed from the KSE in late 2008.

Stock dealers believe that investors are engaging in a silent protest against the government for the unilateral implementation of the CGT. On the whole, volumes slid by 33.7 percent, down to 52 million shares traded on average per day, during the week.

Another reason for the low volumes has been that the government has so far failed to clarify the modalities of the tax, including investors’ concerns like the tax being offset by losses made on other stocks, the implementation on mutual funds and on purchases made by foreigners.

The negative effect of the tax was so strong that investors remained sidelined despite the International Monetary Fund’s appreciation that Pakistan’s economy was on the right track and also the inflow of $710m into state coffers to meet the targets of budget deficits set by the IMF.

There was also significant merger and acquisitions activity during the week which created some short-lived interest in the concerned stocks but failed to provide a boost to the market.

During the week, Pakistan State Oil announced that it was conducting due diligence to purchase a majority stake in Pakistan Refinery Limited. Arif Habib Securities announced that it was purchasing a stake in Javed Omer Vohra & Company and Azgard Nine Limited announced its intention to sell its stake in Agritech Limited.

Interest in blue-chip stocks was restricted, except some foreign buying in Engro Corporation and the Oil and Gas Development Company’s stocks. The remaining activity was in second and third-tier stocks and average daily value fell by 40 per cent to Rs1.5b during the week.

Total market capitalisation of the KSE decreased by 0.7 per cent to Rs2.73 trillion by the end of the week. Foreign buying again withered away and stood at only $2.6 million, after being recorded at $21 million in the previous week. Companies were the major net sellers and offloaded shares worth $2.4 million during the week.

Going forward, the market can be expected to remain in a flux until clear guidelines are not issued by the government about how the tax will be employed. The market can expect low volumes and range-bound movement in the interim period.

With volumes hitting rock-bottom, the need for the margin financing product has become all the more important. The final product can be announced in the following days and will hopefully bring much needed activity back to the market.

Published in The Express Tribune, July 4^th, 2010.