Why and how KSE became the world’s second-best performing market this year

Published: October 6, 2013
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In KSE’s case, the individual industries are relatively very small, hence, these members have specialised in maximising returns from small industries with many small markets, rather than a few large ones. PHOTO: FILE

In KSE’s case, the individual industries are relatively very small, hence, these members have specialised in maximising returns from small industries with many small markets, rather than a few large ones. PHOTO: FILE

DUBAI: 

The Karachi Stock Exchange has broken its all-time record this year, proving a point to the world by becoming the second best performing market on the planet, where only Japan’s stock market has been able to perform better.

When the biggest economies seem to be struggling, investors have looked to explore smaller markets to gain speedy returns, giving way to markets such as Mexico and the Philippines, but there are reasons why Pakistan has outperformed all three of them.

The first and foremost reason is the investor moratorium applied in January last year by the Securities and Exchange Commission of Pakistan (SECP), in collaboration with the KSE it allows foreign investors to bring investments to Pakistan with no questions asked about the money’s origin and sources, allowing black money to make its way to the whitening mill, with the SECP’s will.

This passing of the amnesty not only brought foreign investment into KSE but also encouraged local owners of undocumented wealth to enter the formal economy and let that money revolve around the taxman. This moratorium is to stay until June 2014, and has had an enormous effect on the KSE, more than doubling the daily average traded volume.

Here’s another huge reason why KSE has been rocking it out. The SECP allows anyone to own 100% shares in any company in Pakistan, not only that, but he can take out as much profit as he wants, as long as he pays taxes – all income after taxes is remittable outside Pakistan.

Owning 100% of foreign shares is a big deal, most countries don’t allow majority stakes, especially large developing countries like India, China, Brazil and Russia, making Pakistan’s markets more bankable.

Here’s to explain the third reason for the great performance. Most markets rely on technical indices working off large markets, meaning that the index can make long jumps if a particular market has good investments. At most, 30 markets do the trick worldwide, because beyond that number, investor fatigue sets in. It becomes harder to keep track of all the numerous smaller markets as the total number grows.

But, surprisingly, KSE is the opposite. It has way more than 30 markets, making it unique in the world. Then how does it cope with investor fatigue? KSE has a small community of members, 300 odd, at the latest count and they have been in the business for generations, specialising in markets rather than sectors, which allows them to know the KSE inside out and do effortless cross-market play.

Most large stock players worldwide specialise in industries such as pharmaceuticals, energy, technology, etc and stick to it – the very reason why Warren Buffet never invests in the technology sector.

In KSE’s case, the individual industries are relatively very small, hence, these members have specialised in maximising returns from small industries with many small markets, rather than a few large ones.

And to run such a busy stock exchange that has probably the most number of markets in the world requires a state-of-the-art trading engine. The software named KATS, which is a KSE trademarked name, acronym to Karachi Automated Trading System, is what drives trading at the Karachi Stock Exchange. All markets are accessed through the KATS terminal for trading, monitoring and regulatory compliance.

When regulations change or new markets are introduced, the new module is simply plugged in to the KATS infrastructure, making it extremely scalable and robust, apart from being a legendary in-house custom created masterpiece that beats Silicon Valley-based market leaders in performance metrics such as throughput.

All these winning hands and arms of the KSE machine form the second best performing stock exchange in the world. Despite its market cap being a mere $52.7 billion and the country’s economy projected to grow only 3.6% this year, as compared to its competitor developing countries, KSE has invincibly risen more than 40% this year, showing it out to the world how magnetic it is to the dollar, despite the city’s worrying law and order situation.

The writer runs a software company in Dubai

Published in The Express Tribune, October 7th, 2013.

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Reader Comments (33)

  • suzo
    Oct 6, 2013 - 11:19PM

    KSE is performing well, and hike in prices is the sign of that? Isn’t it?

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  • NYC
    Oct 6, 2013 - 11:29PM

    I’m amazed and surprised! I’m pretty sure the bashing Indians will come up with a reason to bash this too, but the fact that KSE is performing better then all their stock exchanges should be an answer enough!

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  • Alann
    Oct 6, 2013 - 11:49PM

    @NYC
    This quote is for you:
    “Owning 100% of foreign shares is a big deal, most countries don’t allow majority stakes, especially large developing countries like India, China, Brazil and Russia, making Pakistan’s markets more bankable.”

    Don’t feel proud. Such stock exchange performances are only temporary. I’m not trying to “bash” Pakistan, but in reality, such ‘flexibility’ is what is going to (or in milder terms, has the potential to) hurt the Pakistani economy and its stock exchanges in the long term.

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  • Jibran
    Oct 6, 2013 - 11:52PM

    Next year will be the record crash. The money has to come from somewhere. It cannot sustain itself at 40%. There is nothing in the economy. After milking the poor and middle class, the investors will put out the money. Watch out.

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  • Dj
    Oct 7, 2013 - 12:00AM

    ‘Black money’ says it all.

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  • Nzaar
    Oct 7, 2013 - 12:18AM

    Just to point out, your statement that warren buffet never buys tech stock is not correct. Buffet owns a ton of IBM stock.

    It’s more accurate to say that buffet usually avoids tech stocks.

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  • ashar
    Oct 7, 2013 - 1:26AM

    Agree with jibran, 2014 is kse crash year, index may reach 13000 And again ll cross 26 27 k 2 years before election while at the end of tenure, govt can say we leave stock at 26 27 k.Recommend

  • Yasir Mehmood
    Oct 7, 2013 - 1:54AM

    No mention of boom after the elections?? Particularly after clearing circular debt investment in power sector increased.Recommend

  • R. Subramanian
    Oct 7, 2013 - 2:17AM

    I don’t think so, Bombay Stock Exchange marketcap is 1.2 trillion dollars where as KSE marketcap is just 53 billion dollars, I am giving this comparison because we can’t compare markets based on the performance alone, there are other factors also… anyhow all the best for Pakistan to perform well in economy don’t get satisfied with small achievements dream for big things and achieve big things. When Pakistan focuses on economic development, it will be good for entire South Asia… SA will be free from terrorism and destruction

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  • Abdul Qadir
    Oct 7, 2013 - 2:52AM

    I don’t why people see the index and calculates the return. KSE 100 index is totally manipulated , if you subtract the points contributed by Unilever, Nestle and other sidelined scrips than you can actually see the real KSE 100 index , the free float machnism has improved the movement of KSE 100 index , but the index was not adjusted based on free flaot and it continues from the same end. Many scrips are still trading at cheap price to earning multiples of below 5. The dividend yield in Pakistan equity markets is the highest from India and other developed countries.

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  • Muhammad Junaid
    Oct 7, 2013 - 5:21AM

    We r second best is that not enuf for u guys …KSE rocks 4 eva

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  • The Economist
    Oct 7, 2013 - 7:45AM

    Being an economist i can observe that in pakistan market price is based just on speculation and FDI and not on basis of EPS which means that share are highly priced compared to their capacity and hence it is likely to fall after sometime and in this process pakistan is becoming the next tax heaven destination but for country like pakistan this money can become death warrant for ur own country, as u guys are playing with double edged sword.

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  • Omar
    Oct 7, 2013 - 9:19AM

    The way I understand it: KSE may have grown 40% since Jan, in PKR currency. But the PKR also has has approx 9.2% devaluation since that Jan 2013. So the growth in absolute terms, factoring in PKR devaluation against USD, the KSE has grown approximately 29%. Still a significant growth but mustn’t be immensely overstated.

    My point being, when writing/reporting for mainstream news media, please research the facts more carefully and DO NOT mislead the viewer/reader-ship.

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  • Mirza
    Oct 7, 2013 - 9:34AM

    KSE rose 40% is a good news. One wonders did it rise 40% in Pakistani Rs. or in US$? The Rs. has lost about 20% in this period. Can some knowledgeable person sort out the truth please for naive people like me?

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  • Danyal Ahmed
    Oct 7, 2013 - 9:55AM

    Farrukh, very well written.

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  • Professor
    Oct 7, 2013 - 11:19AM

    Inflation and the depreciation of the Pakistani rupee have a large bearing on this upmove.

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  • saleem
    Oct 7, 2013 - 11:32AM

    This bull run and bluffing in KSE has proved that stock market is no more barometer of economy and is not linked to economy at all. We are the worst phase of the country in terms of economy, law and order….Then based on what KSE was increasing….its all bluffing….and its not right…Supreme court should take notice of it

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  • Random Passerby
    Oct 7, 2013 - 12:13PM

    KATS infrastructure, making it extremely scalable and robust, apart from being a legendary in-house custom created masterpiece that beats Silicon Valley-based market leaders in performance metrics such as throughput.

    Easy on the hyperbole, dear writer!

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  • AWA
    Oct 7, 2013 - 12:58PM

    Please sack Mr. Abid Sher Ali

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  • shahid
    Oct 7, 2013 - 1:23PM

    If many companies in Pakistan performing excellent and that’s why KSE having the highest dividend yield in our universe. Pakistan will grow as our company’s grow. Please do not forget that Pakistan is a targeted country for drones and the worst scenario of law and order. After 2014 Americans departure from Afghanistan the real story will develop in this area.

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  • Haris
    Oct 7, 2013 - 2:32PM

    @random passerby

    is that not true?

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  • Saleem
    Oct 7, 2013 - 3:15PM

    Through black money and insider trading. Long live corruption, and nepotism.

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  • manish rohera
    Oct 7, 2013 - 3:56PM

    guys if i talk only pure economics this is dangerous let me explain as you invite such huge caches of investment as FDIs or FIIs if it increases beyond a certain level can be very dangerous as they can pull out at one go as we saw in the recent fear of American federal reserve tapering not only it tanks the market but also will affect the coffers of foreign reserves due to currency fluctuation and can create a situation where you have to borrow dollars from World-Bank as a loan and also high fluctuation can lead to higher speculations and higher volatility please this is simple economics I may be an Indian would like you all to be just a bit cautious about your life-savings.

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  • KHAANNNNN!!!!!!
    Oct 7, 2013 - 5:39PM

    The modern day Robin Hood; Steal from the poor, and distribute amongst the rich.

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  • anwar kamal
    Oct 7, 2013 - 5:57PM

    speculation,inside trading may help the rise of bubble index for short time.But finally it will crash.

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  • Ali Shah
    Oct 7, 2013 - 6:04PM

    @NYC:
    Seriously Man, The KSE is manipulated. The article is right. That Amnesty allowed a lot of politicians to clean up their black money. Who cares about FDI when you have AKD cleaners on the job

    Recommend

  • omz
    Oct 7, 2013 - 6:38PM

    @NYC:

    buddy we don’t need indians to bash us. this ‘achievement’ is nothing to be proud off. it shows our growing reputation as the laundry of the world – pump in your black money for all day-all night laundry service. And it shows our deeply speculative nature when it comes to trading. we should be ashamed and bash ourselves vs. waiting for ‘indians’ to come and do it.

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  • Ali Muhammad Khan
    Oct 7, 2013 - 8:11PM

    LOL….
    Indians r more concerned about KSE future…dn’t we know,about what they r concerned!!!we have our own economists…i thing it’s our market n u should respect our sovereignity…

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  • Ch. Allah Daad
    Oct 7, 2013 - 10:00PM

    My concerns are regarding black money. KSE mafia is making huge money but in the long run it will also ruin reputation of all honest investors. One dirty fish spoils the whole pond but in KSE whole pond is filled with filth.

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  • Wajuntee Mala
    Oct 7, 2013 - 11:16PM

    @R. Subramanian:
    Are you Married oh smart one ?

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  • raj
    Oct 8, 2013 - 12:23AM

    @Ali Muhammad Khan: u mean just like drones… ok :)

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  • Shahid Khan
    Oct 8, 2013 - 1:41AM

    @R. Subramanian:
    I liked your comment.

    Recommend

  • Faisal
    Oct 14, 2013 - 1:53PM

    Despite all the Odds Pakistan’s economy is growing day by day. See our banking system, it is one of the strongest banking system in the word and it has been build on strong footings not on the Bubblel like American and Euorpion Banking system is. Our telecommunication industry is growing day by day. Pakistan is considered an innovation factory in Branchless Banking. Our Textile Products are known for quality all over the world. Oil porduction in Pakistan is growing day by day. All these are the factors which are contributing to increase in the KSE.

    In my view Pakistan will be the investment heaven for Forign Investors in coming years as Labour and energy prices are very cheap here even cheaper than China. The only hurdle is energy crisis which requires long term planning.

    Recommend

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