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KSE outperforms world stock markets, registers 109 percent growth

KARACHI (December 30 2002) : The Karachi Stock Exchange (KSE) during 2002 registered a significant growth of 109 percent and outperformed all stock markets of the world as investment from overseas Pakistanis filtered in and low interest rates increased participation from the banks, individuals and financial institutions.

The KSE during 2002 recorded an increment of 109 percent, to 2,661.37 points from 1,273.06 points recorded on January 1, 2002.

Market capitalisation, or value of shares, rose by Rs 293.995 billion, or $5 billion, to Rs 591.415 billion.

Several foreign independent analysts during the year termed the KSE as the best performing market in the world, compared with regional bourses.

Sri Lanka stock market rose by 30 percent after opening of peace talks between the government and the Liberation of Tamil Tigers Eelam, the separatist group.

The talks indicated that the decades-long civil war would end soon and the country would move towards economic stability.

The Mumbai stock market survived following tension with Pakistan and collapse of mutual funds, drought and delays in assets sale plan.

Recently, Shaukat Aziz advisor to prime minister on finance and economic affairs, while appreciating the performance of the market, observed that the current upsurge was due to a number of positive developments, both internationally and locally.

He said that the reduction in the interest rates was one of the major factors, which had a positive impact on the capital market development in the country.

The stability of the exchange rates, backed by strong build-up in foreign currency reserves, low inflation rate, as well as increased revenue collection by the government by over 16 percent during the current financial year as compared with the last year and TFC growth have resulted in increased economic activity in the country.

The advisor also acknowledged the role of SECP in the corporate governance and enhancing the efficiency and operational transparency at the stock exchanges which have positively contributed to the increased dividend pay-outs compared with the previous years and visible change in the corporate behaviour, thereby restoring market confidence among the investors.

Sakib Sherani, of ABN Amro Bank, said that giving further perspective to the re-rating of the domestic equity markets, the market capitalisation of KSE surged 111 percent since October 2001, rising from the equivalent of $4.3 billion to a more respectable $9.9 billion.

In addition, average daily traded volumes have grown almost five-fold.

In terms of GDP, market capitalisation has risen from 8.1 to 15.7 percent, still below the approximately 22 percent figures recorded in the early 1990s.

The performance of Pakistan's equity markets over this period mirror a large extent the remarkable turnaround in the country's external account, he added.

Robust capital inflows, an appreciating exchange rate, declining interest rates, rising domestic liquidity, and improved sentiment all combined potently to cause a reflation of domestic equity indices.

“To a significant extent, the increase in asset-prices represents a correction of the downward overshoot that occurred post-May 1998,” Sherani said.

Nevertheless, the rapid rise begs the question: is over-optimism (“irrational exuberance”) carrying the market into dangerous territory?

On fundamental valuation basis, this does not appear to be the case.

Using reported earnings data released by the Karachi Stock Exchange (net profits after tax for all reporting firms, unadjusted for exceptional items), it transpires that the headline trailing price-to-earnings ratio for the market on the whole was around 7 multiples for 2001-02.

Given the robust growth in corporate earnings recorded since FY 2000, the prospective profit per earning would appear to be substantially lower.

In addition, looking at the valuation of the broader market by stripping out the impact of large volume, high absolute profit companies, Hub Power Company and Pakistan Telecommunication Corporation Limited (PTCL), the market profit per earning was around 10 multiples for 2001-02 , which does not suggest any significant degree of overvaluation at current levels.

Going forward, even if the market continues rising and appears to have become fundamentally overvalued at some point, it is believed that on current trends it will continue to be carried upward by liquidity flows.

However, the market will become more volatile, dictated possibly by bouts of profit-taking as well as “news-flow” emanating from unfolding political and geopolitical developments.

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