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PSX investment: time to take a thorough review

PSX investment: time to take a thorough review

Interview with Muhammad Azam Khan — Economist/Capital Market Expert

PAGE: Tell me something about yourself, please:

Muhammad Azam Khan: I have more than 22 years of professional experience (20 years in Pakistan’s financial sector including a capital market with primary and secondary market activities), mutual funds, equity brokerage (local and international), block deals & corporate finance.

I started my professional career with international exposure in a highly proficient environment with dedication and commitment. My role was to maximize the efficiency and visibility of logistic operations while simultaneously achieving best practices in system, process and technology, continuous improvement, supply chain and delivery. Resuming responsibility for the entire logistics lifecycle from strategy to process flow, improvement, automation and operations; including, but not limited to forecasting and resource planning, inventory control, rate setting, outsourcing, vendor selection, and distribution. Evaluate the organization’s operational performance against KPIs and timelines and coordinate activities across all units of the organization.

Since 2008, performing as CEO/Nominee Director of a leading equity brokerage house, provided expert advisory services to equity desk of major Institutions (local and international), portfolio management and portfolio advisory of high net worth individuals, administrative, operational, research, accounts/finance, compliances, sales & marketing objectives in the financial world. I developed Sunrise ( a complete brand equipped with diversified expertise of human resource working passionately.

I am one of the pioneers to explore an idea and initiate an online trading platform in Pakistan’s Capital market and convinced stakeholders and previous manual equity trading investors to divert towards this revolt which was not an easy chore. Furthermore, I enjoyed rendering my abilities as “Chief Operating Officer” at a previous equity brokerage house and bringing structural reforms to the institution which result succeeded comfortably in an effective exit strategy before the financial crunch of the capital market in 2008. Before that started their career as “Research Analyst” way back in 2001 and then joined Atlas Investment Bank Limited in Equity Research and Corporate Finance Department as “Investment Analyst” in 2004, later promoted to “Senior Investment Analyst” and Assigned to handle International Corporate Client (JP Morgan Chase & Co) with other Local Corporate Institutions.

I was invited by “All world Harvard in 2014” and they recognized my contribution and progress in Pakistan’s capital market and acknowledged me as “The best and fastest escalation entrepreneur” of Pakistan’s capital markets.

PAGE: Could you tell me about the investment by foreign investors in PSX?

Muhammad Azam Khan: Foreign individuals and institutions as well as overseas Pakistanis can invest in securities listed on Pakistan Stock Exchange. They can benefit from potential growth opportunities available through investing in the Stock Market. For non-resident Pakistanis, investing in PSX is especially an attractive opportunity as it will enable them to benefit from the competitive returns from the Pakistan Capital Market while being stakeholders in their homeland’s economy. To open Roshan Digital Account, a Non-Resident Individual can access any of the designated banks’ website/portal/app and fill Digital Account Opening Form, entering the required information and submitting soft copies of documents. Bank will perform its Know Your Customer (KYC) and due diligence based on the information provided and confirm the status of the Account Opening to the individual in 48 hours.

Foreign investment in the Pakistan Stock Exchange (PSX), one of the best performing Asian markets, bisect to Rs454 billion in the past four years despite share prices becoming more attractive compared to those in other emerging markets. The latest pullout of foreign investment may be attributed to the third wave of the Covid-19 pandemic in Pakistan as overseas investors became net sellers in the past 24 months. Foreign investment hit a record high at Rs947 billion in May 2017 compared to Rs454 billion on April 16, 2021, showing that almost half of the foreign investment had been wiped out over the past five years, according to the State Bank of Pakistan (SBP) and National Clearing Company of Pakistan Limited (NCCPL).

In the past 15 months alone, international investors divested around Rs480 billion from the Pakistan bourse. The aggressive pullout of foreign investment, however, failed to derail the market. Local institutional and retail investors injected money to buy shares at lucrative prices and the market continued to trade on both sides of the fence even during the Covid-19 pandemic. To recall, the benchmark KSE-100 index hit an all-time high of nearly 52,700 points in May 2017 when foreign investment reached a record high of Rs947 billion. Over the past four-year period, it oscillated between 28,000 points on the downside and 48,000 points on the upside with a market capitalization of $45 billion on the lower side and & $50 billion on the higher side.

Inking of the International Monetary Fund (IMF) program worth $6 billion by Pakistan in May 2019, the temporary suspension of the program amid Covid-19 and its recent resumption weighed on the minds of investors, including foreign investors. More importantly, hasty changes to the government’s economic team took a toll on foreign investors’ interest. “We have made a world record and changed five finance ministers over the past four years” further, the highest inflation in the region of 26.6% in October 2022 which also put equity investment at risk

Currently, 90% of shares are offering 50 to 60% discount at PSX compared to other emerging markets like India. This discount level increased from 10% to 60% in the last 3 years.

PAGE: What is the impact of dwindling currency on investment in PSX?

Muhammad Azam Khan: The impact of interest rates, exchange rates and inflation on stock returns are correlated. All three macro variables are considered very important for the economy of any country and any change among these variables affects the economy in various ways and the regulatory authority takes steps in order to make changes in their policies which can affect the economy in a positive way. The exchange rate is negatively related to stock returns. An increase in the exchange rate causes a decrease in stock returns of PSX benchmark index shares. The decrease in the return of the stock is because when the foreign investors invest their money in the stocks and by an increase in the exchange rate causes a decrease in their income because they will get less amount of money in their own currency because of the increase in the exchange rates which is not a favorite for the foreign investors.

Earlier, they continued to exit the market following the hefty depreciation of the rupee against the US dollar, low foreign currency reserves and a high inflation reading, all of which put foreign investment at high risk. Pakistan is grappling with fast-depleting foreign currency reserves, a declining rupee and widening fiscal and current account deficits. Reserves have fallen to as low as $8.9 billion, hardly enough to pay for 60 days of imports bill.

The Pakistani rupee is one of the world’s worst-performing currencies in the last 3 years. State Bank of Pakistan has taken numerous measures to stabilize the rupee and the Federal Investigation Agency (FIA) is continuously cracking down on hoarders and smugglers to restrict the outflow of the American currency and ease its demand, the flight of the dollar continues.

The Pakistani rupee has depreciated 73.5% against the US dollar in the last five years. The value of the Pakistani rupee has fallen from 123 against the USD in August 2018 to 177, a decline of 30.5% and from 177 to 254 in just 6 months of 2022 which is the highest in percentage at 43%. This makes it one of the highest devaluations of the currency in the country’s history. Notably, the only other higher devaluation occurred following the fall of Dhaka, and Pakistan’s currency was devalued by 58% from 4.60 to 11.10 against the USD in 1971-72. There was a complete breakdown of economic policymaking as the country’s fiscal policy had become subservient to monetary and exchange rate policies. The monetary tightening and exchange rate depreciation resulted in higher inflation, public debt, and debt servicing.

Pakistan is already facing huge business losses due to political instability, and the law & order situation which resulted in economic turmoil, especially since 2016. Dwindling Pak currency impacted very negatively on Pakistan Stock Exchange and witnessed only outflows since 2017. Although, with the most attractive yield in the region and in the near future it will not convert into inflows till the foreign exchange reserves stabilize including remittances which can cover the annual trade deficit.

PAGE: Could you tell us about the investment in PSX vis-a-vis other countries?

Muhammad Azam Khan: Pakistan and India got independence in 1947 and currently India has foreign exchange reserves of $575 billion and we have a foreign debt of $135 billion. Pakistan’s capital market capitalization is around $50 billion, while India’s equity market has broken into the world’s top five clubs in terms of market capitalization for the first time.

The country’s total market cap stands at $3.21 trillion, which is higher than that of the UK ($3.19 trillion), Saudi Arabia ($3.18 trillion), and Canada ($3.18 trillion). This year, India has climbed two positions, despite a 7.4% drop in its market cap. At the start of the year, the UK and France ranked fifth and sixth with a market cap of $3.7 trillion and $3.5 trillion, respectively. Russia’s attack on Ukraine has upended the ranking with European nations seeing the maximum erosion in market cap. Germany, once among the top five markets, has now slipped to tenth. Meanwhile, Saudi Arabia has climbed three places from 10th to 7th. The country, particularly its biggest firm Aramco, stands to gain from the surge in oil prices this year.

Even Bangladesh got independence from Pakistan in 1971 and currently has 4.5 million capital market investors and Pakistan still carries 250,000 investors of which only around 50,000 are active on daily basis. Pakistan capital market investments can increase by a free float of government shares, independence from the last 40 years’ controlled system and availability of shares from controlled holding in the highest dividend-paying listed companies.

Local investors are already shy from the capital market since 2005 which resulted in 20,000 families suffering huge losses due to planned overnight withdrawal of financing and international investors are still on the sell side since 2017.

Covid-19 is the main cause of ejection from regional markets including India and Bangladesh and witnessed outflows from capital markets but they have political and law & order stability which unfortunately Pakistan did not have since long.

PAGE: Are the current policies favorable for the investors?

Muhammad Azam Khan: Pakistan’s regulatory bodies and policies are intact for investors but unfortunately other factors did not allow investors to invest with a big heart and consider Pakistan as a permanent investment hub. In the current scenario, we have changed 5 finance ministers and 2 governments in the last 4 years so the policies change overnight. The difference between developed countries and countries like Pakistan is only the difference in policy implications. Policies are for the long term at least for 10 years either in any circumstances which resulted in confidence to investors and this is the main reason the developed countries are more progressive. If any, the country having a regulated or somehow overregulated system but a continuation of policies are still in question may always suffer till the assurance of policy continuation to investors either in any democratic or even military government.

Pakistan’s political dynamics may not change in near future but if political parties including the establishment decide to the continuation of policies under any circumstances can lead to attracting great investments from developed countries because of population growth per year by more than 2.5% and double-digit profit rates.

Current policies are favorable but a continuation of these policies or what time is still a concern for every investor. The top 100 groups of the world are hunting aggressively to multiply their assets, which is possible only in underdeveloped countries but need assurance for their investments and policy continuation.

PAGE: What is your perspective about the economic problems on the performance of stocks?

Muhammad Azam Khan: The stock market affects individual businesses in an economy in many different ways. In Pakistan, there are just 563 publicly-traded stocks that can be divided broadly into 4 classifications including KSE 100 Index, All shares Index, KMI 30 Index and KSE 30 Index main and the benchmark is KSE 100 Index others with daily movements across the board, there can be a multitude of effects.

Defined as the market in which equity shares of publicly-traded businesses are bought and sold, the stock market measures the aggregate value of all publicly-traded companies. Most analysts and investors focus on the KSE 100 Index. This index can be a valuable tool for gauging the health of the overall economy, though occasionally stocks may be misleading.

Typically, the stock market and economic performance are aligned. Thus, when the stock market is performing well, it is usually a function of a growing economy. Economic growth can be measured in several ways, but one of the most prominent is by following gross domestic product (GDP)

When GDP is growing, individual businesses are producing more and usually expanding. Expanding business activity usually increases valuations and leads to stock market gains.

Historically, steep market declines preceded the Great Depression in the 1930s as well as the Great Recession of 2007–2009. However, some market crashes, most famously Black Monday in 1987, were not followed by recessions.

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