KSE gained in 2012 on political stability, says deputy MD

London, Hong Kong and Shanghai exchanges eyeing a strategic stake.

KARACHI:

To declare support for a long march against the government and withdrawing that decision afterwards may hardly seem momentous events in everyday politics. However, political posturing certainly scares investors away from the equity markets, resulting in lower-than-expected performance.

A case in point is the January 10 trading session at the Karachi Stock Exchange (KSE). According to Elixir Securities, a brokerage house, equities wiped off gains made early in the week, as politics reined in the bulls amidst lots of noise on a planned long march and a political party chief’s promise to deliver a “political drone strike.” As a result, the KSE-100 Index shed 212 points, or 1.3%, in just one session.

“One major reason the KSE managed to perform exceptionally well in 2012 was that the government looked stable in parliament. Nobody doubted that the government could face a no-confidence vote in parliament because of the cooperation assured by allied parties,” KSE Deputy Managing Director Haroon Askari explained to The Express Tribune in an interview. “Political stability was key to KSE’s stellar performance last year” he added.

The KSE was one of the best performing stock markets in 2012: the benchmark KSE-100 Index gained 49.3% and nearly touched the 17,000 points level by the close of the year. In dollar terms, it offered an impressive 37% in returns, despite the devaluation of the rupee with respect to the dollar, said Askari.

In comparison, India’s Sensex-30 Index rose by a lower 26% in 2012. Hong Kong’s Hang Seng, United States’ Nasdaq Composite and United Kingdom’s FTSE-100 Index too rose by only 21%, 15% and 7%, respectively over the same period.

Askari says that good corporate results, a 4.5% reduction in the benchmark interest rate over the last 18 months, and a decline in the rate of inflation to single digits were the primary factors behind the impressive returns on the KSE.

“Foreign institutional investors were net buyers in 2012. Foreign portfolio investment netted more than $450 million in 2012, which helped the KSE-100 Index grow,” he said; adding that average daily volumes also increased, especially during the last quarter of the year, to touch the 275 million shares level. “A majority of the activity remained in second- and third-tier stocks, which, I believe, is a good thing,” he said.

Future outlook

Being a self-regulated organisation, 2012 was a particularly good year for the KSE given its progress towards becoming a demutualised stock exchange. “Demutualisation is the biggest change that has already taken place, paving the way for stronger risk management mechanisms,” Askari explained; adding that the separation of the KSE’s regulatory and commercial departments has removed the possibility of a conflict of interest. He says that small and medium-size companies in 2012 will enjoy more relaxed terms and conditions if they wish to get listed on the stock exchange.

As for the 40% stake in the demutualised KSE reserved for a strategic investor, Askari says he is not in a position to name the front-runners yet, as the issue is being handled by Deutsche Bank – the KSE’s financial adviser. “We have until 2014. Deutsche Bank has done the evaluation and will now conduct road shows and develop an information memorandum etc,” he said.

The strategic investor can only be a stock exchange, national clearing company, or depository company with 10 years of experience and paid-up capital of Rs20 billion or more. Askari, along with other KSE officials, visited London and China last year to gauge the interest shown by the London and Shanghai stock exchanges in becoming the strategic investor in the KSE.

“London Stock Exchange officials showed immense interest in acquiring the 40% stake, as they already own 5% in the Delhi Stock Exchange. Chinese investors were also equally enthusiastic,” Askari said. He added that the Hong Kong Stock Exchange has also shown interest in taking part in the KSE’s demutualisation.

Published in The Express Tribune, January 12^th, 2013.

Like Business on Facebook to stay informed and join in the conversation.