Depth of Pakistan stock markets declining sharply

[LahoreEstate]

RECORDER REPORT
KARACHI (March 09 2009): Pakistans equity market was once famous for its depth that is liquidity. Due to sufficient volumes, Pakistan market up till last year was able to sustain large orders without impacting the market price.

But that is not the case now. Due to unwarranted three-and-a-half month closure of market coupled with the absence of low cost investor friendly leveraged products, the market activity has declined substantially.

Few years back Pakistan was one of the most actively traded stock market in Asia with turnover velocity (turnover divided by market capitalisation) of 380% in 2005. That is investors used to trade four times the value of market in a year. In other words, they were trading 20 times the shares available in the market (free float).

These higher volumes in the past at the one hand provide the much needed liquidity and depth to the market but on the other hand this excessive volume signalled that the market was over speculative thanks to easy availability of funds through badla and deliverable single stock futures. But that was something that attracted investors attention as the market was providing opportunity to enter and exit without any major impact on share prices.

Right now turnover velocity is only 60%. With average daily volume of approx Rs4 bn (US $50mn) a day in first two months of calendar year 2009, the investors are turning less than the size of the market in a year which has shrunk from US $75 billion last year to only US $22 bn now.

Thus in line with other regional markets, size of Pakistan stock market has plummeted to 13% of GDP from as high as 47% of GDP one year back. This has also caused the market depth to reduce compared to what it was previously. In order to generate depth in the equity markets, besides political and economic stability, there is an urgent need to develop derivatives market. A CFS-led crisis which was seen once again at the end of last year does not mean that leverage is bad. All major emerging markets have some sort of leverage products available in one form or the other, says leading market analyst Mohammed Sohail.

Regulators in Pakistan have been reported to have once again decided to phase out CFS. Exchanges have already raised margin requirements on CFS and deliverable futures to a high level forcing investors not to leverage.

According to Sohail, the need of the hour is to promote and develop well managed leverage products so that market depth returns to local capital markets. Otherwise both local and offshore investors will loose charm in trading in local bourses because higher returns without adequate liquidity make little sense.

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