Stock market: Volumes grow, but trading base remains narrow

KSE has for the most part been driven by index heavyweights.

KARACHI: Trading volumes and market capitalisation of the KSE-100 index companies, as a percentage of the market’s total trading volume and market capitalization have continued to remain significantly high, with KSE-100 companies accounting for 96% and 73% of the total market capitalisation and trading volume in FY’10 respectively. This means that a significant portion of activity at the KSE is generated by only 15% of the total listed companies.

Moreover, out of the KSE-100 companies, very few companies account for a major portion of trading activity. The top ten companies by trading volume accounted for 65% of the total trading volume in FY’10. On average, the top ten traded companies accounted for 83% of KSE-100 volume during the period FY’01-FY’10. This shows that the market is highly skewed and relies on only a handful of shares to generate trading activity.

The mix of the top ten traded companies has changed slowly from FY’01 to FY’10, which reflects the skewness of the market, in favor of some companies. This slow change in the ‘trading mix’ indicates weak dynamism and diversification in the market. A higher rate of change in the ‘trading mix’ would show a high extent of dynamism and market depth. The trading mix also indicates that the banking, cement, and fuel and energy companies have attracted investors in recent years. Trading activity limiting itself to only a handful of companies and sectors shows that the stock market lacks diversity.

The writer is an assistant professor at SZABIST.

Published in The Express Tribune, March 5^th, 2012.