History 37 million rupees. The first index

History

Karachi
Stock Exchange limited formerly known as
Pakistan Stock Exchange is the only most liquid stock exchange in the country.
The Stock Exchange was established on 18th September, 1947 but was
incorporated two years later and had only five companies listed and had a total
paid-up capital of 37 million rupees. The first index was introduced when the
stock exchange had a listing of 50 companies and was then termed as KSE-50
index. The trading system used in the initial stages was the open out-cry
system where professional would gather on the trading floor and transfer
information through shouting and hand signals about the buying and selling of
stocks.

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As
the stock exchange started growing, the listed companies were increasing
exponentially. This level of growth in the Stock Exchange required an adequate
representative index and an immediate need of tracking the trading activities
through developed computer systems was felt. It was on November 1, 1991 that
KSE introduced KSE-100 and introduced a computerized trading system for an
efficient buying and selling of stocks. This computerized system was able to
perform 1 million trades every day and connected a vast number of users who
wanted to be a part of this trading system.

By
keeping the future of index trading in mind KSE introduced an all-share index
in 1995 and by September of that year it was operating on full pace. As the investor community was growing two other
indexes were later introduced which were called KSE-30 and KMI-30.

 

PSX in next 5 years

Although it is impossible to predict the PSE for the next
five years, but we can understand it by looking at the forecasts for the
Pakistan GDP for the next five years and then break it down for the sectorial
analysis. Broadly speaking there are three sectors of the economy of Pakistan:
Agriculture, Industrial and Service. 
These sectors can be further divided in to subsectors and the growth of
GDP can be linked to the performance of PSE since all the listed companies on
PSX are from these sectors.  The
performance of PSX will also be understood from the prospective of the
political risk in the country. International Investors are more attracted to
countries that have predictable democratic practices.  Pakistan Stock exchange remained one of the
best performing stock markets for a considerably longer period of time.
During financial year
2016-17, the benchmark index of Pakistan Stock Exchange (PSX) opened the year
at 37,966.76, touched a new high of 52,876.46, slipped to 44,914.45 but finally
managed to close the year at 46,565.29 points.

According to the economic survey of Pakistan 2016-2017
the country’s overall economic growth rate was highest with growth of 5.28
percent in the last nine years while last year the growth was 4.51 percent. The
total volume of GDP has crossed 300 billion USD.  The agriculture sector witnessed a growth of
3.46 percent as compared to low growth of 0.27 percent last year while the
Industrial sector also registered a positive growth of 5.02 percent. Large
scale manufacturing, which is 80 percent of the total manufacturing in terms of
volumes also registered a growth of 4.61 percent. The service sector which has
the largest share in the GDP among the three sectors also registered an
impressive growth of 5.98 percent against 5.55 percent last year. During the
year 2018 around 10,000 MV of electricity will be added to the national grid
from CPEC which will be a huge boast for the manufacturing sector. During the
last decade, the economy of Pakistan was plagued by the severe energy crises
and according to the estimates by the state band, the energy crises costs
around 3.5 percent of the GDP. The 56-Billion-dollar Investment by China in the
form of CPEC can benefit the economy of Pakistan in coming years as it
addresses the two vital components of the Pakistan’s economy: Energy and
Infrastructure.

Predictable democratic practices are also considered to
be an important variable for the performance of the stock market. A stable
economy backed by a strong democracy is preferred by the investors.  The smooth transition from and elected
government of PPP to PML (N) is good sign for the democracy and Pakistan is
poised for the elections in the year 2018, and there seems to be no immediate
threat of an army coup. Army has taken strong measures against the terrorists
in the tribal areas and Karachi and today Pakistan is much safer than it was 10
years back. The menace of terrorism has been defeated to a much larger extent
and peace has been restored in Pakistan.

The 50 Billion Dollar project China Pakistan Economic
Corridor will have a great impact of the economy of Pakistan in the next
years.  The project addresses the two
critical components to the economy of Pakistan: Energy and Infrastructure. In
the year 2018 around 10,000 MV of electricity will be added to the national
grid through CPEC which will boast the manufacturing sector of Pakistan. The
CPEC is investing in cost efficient energy production such as coal, micro hydro
plants and nuclear energy. Coal is being extracted from Thar which will be used
for the electricity generation. The coal reserves at Thar are estimated to be
around 3 trillion dollars of wealth. Under CPEC 9 special economic zones will
be established in the country. Although some critics argue that the
establishment of special economic zones will give the Chinese manufacturers an
unfair advantage and it will cannibalize the existing Industry in Pakistan but
in my opinion, the establishment of special economic zones will increase the
net exports and make our Industry more competitive if the Pakistani firms will
go for joint ventures with the Chinese firms. The government of Pakistan needs
to draft a comprehensive Industrial policy, which is still not clear to the
local businessmen.

Consumption, Investment and Exports are the main drivers
of any economy. Pakistani community is a strong consuming community. According
to the last census 63 percent of the total population are below 25 years which
makes it an attractive destination for consumer products. However, the exports
and Investments are very low as compared to other countries in the region.
Pakistan exports as a percentage of GDP was a meager 8.69 percent in 2016.  Similarly, FDI sis not even 1 percent of GDP
of Pakistan.

The availability of energy from Pakistan China Economic
Corridor (CPEC) is expected to drive the exports by providing the uninterrupted
energy to the manufacturing facilities. Since the government of Pakistan has
pledged a 17 percent return for the equity financing of the energy projects,
the yearly outflows resulting from the equity financing from these projects has
to be compensated with a minimum growth of 14 percent increase in the exports.
The government believes that growth can be achieved.

The second component Infrastructure from CPEC will also
drive the sectors of the economy such as the transportation. It is estimated
that around 8000 trucks will travel on the corridor in a daily basis. CPEC will
be a huge boast for the trucking and warehousing Industry. A better
transportation network will also decrease the lead times significantly and give
asses to raw materials which will greatly enhance the manufacturing sector. The
roads will connect the remote parts of Balochistan and Gilgit-Baltistan
province providing access to the raw materials. Tourism Industry will benefit a
lot from the connectivity.

The biggest reason to be optimistic about Pakistan is the
Chinese investment that is pouring into the country though the Chinese
investment in the Pakistan stock market is not officially part of the China
Pakistan Economic Corridor (CPEC) even then more than $55bn inflow is expected
to come into the country in the next five years, according to a forecast from
the Pakistan Business Council. What China is doing for Pakistan is what
Pakistan cannot do for itself .by providing functioning infrastructure. The
most critical of these involves building power plants to solve the country’s
endless energy crises, which has become one of the biggest constraints on
economic growth. Last year investors secured on to what Chinese investment
might turn up for Pakistan. The stock market is up more for than 40 per cent
over the past 12 months, and touched a record high in January. However, its
momentum has slowed, rising only about 3 per cent this year.

Milestones reached

In 2002 KSE was declared as
the best performing stock market of the world in the business week. Started in
1947 with only 5 companies it had acquired 652 companies in its list by 2009
with the capital of Rs 2.561 Trillion. It was in December 2007 when KSE reached
a pinnacle and closed at 14,814.85 points.

Foreign investors started
taking interest in the growing stock market and as per the SBP the foreign
investment in the capital market have reached up to US$523 million. Pakistani
research analyst have derived that 20pc of the free float in KSE-100 Index is
in the hands of foreign investors.

A major milestone was
achieved by the stock exchange when KSE-100 Index exceeded from 15,000 points
for the first time ever on record and the 7.4% increase in 2008 made KSE stand
out among all the emerging markets. There are several more milestones to be
achieved by the stock exchange as its board of directors have planned on
constructing a 40-storey building to invite further investments

 

Times of economic recession     

Over the years Karachi Stock Exchange have
not only experienced times of great success but failure and crisis have been a
part of its successful journey. 2008 and 2009 were the years of economic crisis
which had an impact on the stock exchange making it crumble to a great degree.
In 2008 a high rate of inflation in the economy raised the interest rates in
the state bank of Pakistan and resulted in a drastic crash in KSE. Due to the
continuous crisis faced by the stock exchange in 2008 and 2009 many brokers
left and looked for other jobs.

 

Future Performance based on past trends

Pakistan’s expected inclusion in the MCSI
emerging markets in early 2016 was an important proponent of the KSE boom
experienced before 1st June when the report was due to come out.  On May 25th 2016 KSE ended the day
at an all-time intra-day high of 43,124 points which was 11pc up from January 1st.

However, by end of trading on March 31st
the stock exchange closed 12pc down, with net outflows of $81.7m. Six local
companies which were expected to be part of the MCSI EM Index traded the
highest with big investors buying up stock in them. by the end of the month the
stock prices had risen to unsustainable levels and as the EM funds showed
little interest in buying shares of these companies these investors began to
wind down their positions.

Speculation plays a major a role in the
position of stock exchanges the world over. The same applies for Pakistan where
political upheaval, global economic conditions and expected industry performance
are the major factors that impact the environment of the Karachi Stock
Exchange.

In 2007 following rumors that Martial Law may
soon be imposed KSE gains eroded by 3.7% and when this news became fact, KSE
experienced similar falls per week.

More recently, following the disqualification
of Pakistan’s Prime Minister Nawaz Sharif by the Supreme Court the Stock
Exchange collapsed falling by over 700 points is a minute.

These previous incidents are indicative of
the fact that the Karachi Stock Exchange is highly sensitive to changes in
Pakistan’s political structure and any indications of upheaval will have a
seriously negative impact on trading.

Valid
Concerns About Pakistani Markets:

Investors are yet to decide
whether CPEC will be long term game changer For Pakistani Markets or It is
china who will be the ultimate Beneficiary from the project.

How well are local
industries are going to Get benefited, will local Cement Steel, and Heavy
Chemical Industries go through an upward trajectory, will there be any Chinese
Capital inflows in Cement and Steel.

Pakistani Markets will reap
benefit of being local or Chinese Markets earn better because of their terms of
trades and Investments, since many Contracts under CPEC are not Public and the
contracts in Development of Power Sectors that are made public are guaranteed
with the equity returns.

Law and Order situation in
Pakistan this year was quite Better from the preceding years and there were
less Incidents that adversely effected the Stock prices this year with Pakistan
Being a part of the war on terror it is still under watchlist.

Economic Progress is seemed
to be Fragile, growth was below 5 % last year is expected to grow around 5.2 %
this year according to Asian Development Bank sources, the Cost of Capital is
at it 43 years low. Country’s exports are declining and its competitors
Bangladesh and Vietnam are growing.

Percentage of Manufacturing
is decreasing in GDP and is meagre at around 13% remittances are going down
owing to the large layoffs from Saudi Arabia and UAE and Balance of Payments
are Under pressure.

Talent acquisition and
Management is impressive whether at multinationals such as Unilever or local
companies such as Engro or National foods.

The wave of Chinese
investment will create a huge impact to Pakistan for sure. But it is also
possible that alongside the power plants, infrastructure roads and ports,
China’s investment can leave a trail of bad debts as well.

 

Sectors that can be
Possible Gainers in terms of growth:

Cement:

Encouraged by consistent domestic demand and government’s
focus on a host of infrastructure projects, the cement industry has planned to
increase its capacity by 26.25 million tons over the next two to three years to
support a smooth growth of the national economy.

The growth trend indicates that in the next two
years the current production capacity of 46 million tons will be insufficient
to meet domestic demand. The industry is making massive investments to add new
capacities.

Analysts are foreseeing that the capacity would increase
to 72.25 million tons in the next two to three years with additional domestic
sales of 26 to 28 million tons. Owing to the fact that cement is most
technologically advanced industry despite of tariff and non-tariff barriers.

The cement consumption is considered a strong
barometer of economic growth.

In the 2016-17 budget, the government increased
taxes on cement from Rs600 to Rs1,000 along with 17% sales tax. The increase
would take government revenue on cement sales from the previous Rs2,492 to around
Rs3,250 per ton.

Steel

As per international
standards, every five tons of cement used in infrastructure projects require
one ton of steel. Around ten steel mills are listed on the Pakistan Stock
Exchange (PSX), most of them having entered into the capital market between
2011 and 2017.

This represents the highest
number of new listings during the six-year period in any one sector.

Steel companies expect to
gain supply contracts related to the upcoming infrastructure projects under the
CPEC umbrella. These include Orange Line, Karachi-Lahore Motorway and
Neelum-Jehlum hydropower project among others.

Steel sector watchers say
that the country’s steel demand is expected to rise at a 3-year (FY17-19)
combined annual growth rate (CAGR) of 15pc compared to the last 3-year’s CAGR
of 14pc.

currently around 45pc of
the country’s steel requirement is met through imports, local steel players
have significant room for organic growth.

According to the World
Steel Association (WSA), steel use in 2015 was 7.1 million tons in Pakistan,
translating to per capita use of 37.5kg. Going forward, Pakistan’s steel
requirement is expected to swell over 12m tons taking the country’s per capita
requirement to 62kg by 2019.

Analysts believe that the
demand for steel has been increased by a capital expenditure aimed at capturing
the increase in demand of quality steel products that will come about as a
result of infrastructure projects such as power plants, dams, airports and road
networks along with public and private housing schemes.

Manufacturing growth led by
investments in the auto and appliance sector is expected to spike demand for
flat steel rolled by International Steels Limited (ISL) and Aisha Steel Limited
(ASL).

Margins are important for
steel companies. International steel prices have considerably retreated

Besides the escalating
demand for steel in the local market, steel companies are banking on positive
regulatory changes such as an increase in regulatory duty and imposition of
anti-dumping duty.

The National Tariff
Commission (NTC) has imposed anti-dumping duty in the range of 8-19pc on import
of CRC, and 6-40pc on import of HDGC, to counter steel being dumped from China.

On January 19, the NTC
imposed definitive anti-dumping duty in the range of 13.17pc-19.04pc on imports
of Cold Rolled Coils/ Sheets importable from China and Ukraine for a period of
five years.

Analysts stated in their
June 7 report that international steel prices have been plummeting sharply
since Mar’17 owing to surging levels of iron ore inventories in China. Iron ore
prices, which are down 36pc from March, will likely drag international CRC
prices.

Key risks associated with
the steel sector include withdrawal of anti-dumping duty by the government,
adverse movement in HRC Cold Rolled Coil (CRC) spread in international market,
power supply problems and slowdown in economic activity.

Automobile:

The recent episode of currency devaluation 5% against the
green back, we flag that such spurts may drag sales growth margins of
Automobile sectors casting uncertainty for the demand of price elastic
variants.

Sharp increase in steel prices and expected volatility in
exchange rates and slowdown in economic growth may hamper the growth of this
sector.

The fiscal year 2016-17 has
seen an impressive growth in automobile production in Pakistan;

According to Pakistan Bureau
of Statistics there was 5.39% growth in cars and jeeps from 180,717 units in
FY2016 to 190,466 units in FY2017 and 20.74 % increase in the production of
Motorcycles from the position of 2,071,123 units in FY 2016 to 2,500,650 units
in FY 2017

A similar trend of growth
was seen for tractors, trucks, and buses with 54.59%, 36.11%, and 4.49%
respectively.

The numbers for tractors and
buses were also increased substantially from 34,814 units to 53,975 units, for
trucks the output grew from 5,666 units to 7,712 units, while 1,118 units of
buses were produced in the FY2017 as compared to 1,070 units in FY2016.

While all these vehicles
showed a positive trend, the production of Light Commercial Vehicles (LVCs)
declined from 35,836 units to 24,265 units, less by 32%.

With the New Auto policy
implemented in Pakistan it paved the way for many new foreign investments, since
lot of new comers have realized the potential in Pakistani Auto markets owing
to the fact that the current players like Toyota, Suzuki and Honda have able to
accumulate the huge profit margins.

The constant rise in share value
during the last 5 years and extra ordinary growth in financial development of
Auto companies has made this sector looking very lucrative for the Foreign Players
to in invest billions in the sector.  

The use of transport cargo
under CPEC Gwadar to kashgar route will not only derive the demand for heavy
trawlers /4×4 trucks etc., these vehicles may have to be refueled during the
3000km journey hence demand for high Octane fuel and diesel would increase.

LSMI witnessed a growth of
5.6% during FY2017, with Quantum Index Number (QIN) increasing from 131.90
points to 139.29 points YoY for June-July.

Banks:

Devaluation in commodity prices jump has firmed up CPI
trend. analysts eye at least two rate hikes in 2018to bring policy rate at
6.25. Risk of earlier and steeper reversal is contingent on further devaluation
and commodity price trends.

The Sector will be delivering another high double-digit Advances
growth 2018 as economic growth accelerates and commodity prices remains high.

Deposits growth has lagged behind this year estimated at
10% the past 4-year trend due to foreign debt repayment. we believe growth in
both M2 and deposits will remain constrained at 10 -12% which may negatively
impact Banks funding cost.

Possibility of imposition of super tax is high which can
pose to 5-8% risk to the earnings estimates.

Every three out of six banks are facing Capital adequacy
ratio short fall risk due to imposition of penalty or enhanced capital ratio
i.e. 9.4% in 2018.

Habib bank appears to
be moving in right Direction to tackle the major challenge of capital erosion
from supervisory action in US as well as the fact that the Bank of such stature
can easily sustain such jolts. The bank has rightly focused on the growth
strategy to rebuild capital and operational and balance sheet consolidation
without compromising too much on growth opportunities.

Oil and Gas producers:

Rupee devaluation in
Dec 2017 and strong oil prices have created an environment of strong
hydrocarbon pricing for Pakistan E. the impact of both positive trends will
be more visible in 2018.

The Government plans
to Auction new blocks may continue to face delays from ongoing tussle between
federal and provincial governments for the control exploration and production activities.an
early and clear resolution over the responsibilities might help in clearing the
way for materialization of Governments Plan for the Auction on new lease and
future pick up in drilling activity.

Production growth beyond
2019aong listed E is becoming scarce due to lack of major big sized finds.
Discoveries made over the past few years .2018 should bring big production
growth Particularly over Jan -Jun 2018.

 

Power:

Pakistan ‘s power
dynamics are changing whereby reliance on Furnace oil has recently gone
down9.1% in Nov 2017 from 5-year historic average of 35% mainly due induction
of new coal and RLNG plants .it is expected Furnace oil share to drop from the30%
in FY 2017 to 16% in FY 2018.

In efficient plants including
KAPCO, HUBCO, PKGP are poised to gain from changing power dynamics as the
operate with lower efficiencies than the bench mark levels and consequently
will incur the lower fuel losses.

Increasing Circular
debt has been reported at 450Bn which caused severe cash crunch last year
however currently NTDC has now became timely on payment where by cash base of
Power plants will improve slightly, however any one-off payment will remain a
risk for the power companies.

Given Drop in FX
reserves and shifts in GoP ‘s policy to let market forces determines PKR worth
against Dollar, another round of PKR Devaluation is expected, Power companies
may benefit from this as their unique tariff structure provides a natural hedge
to PKR devaluation