GVS: Throughout the world companies do the majority of their funding from stock markets – in Pakistan companies find it difficult to raise funds from the stock market and have to resort to commercial funding from banks. Why is this happening?
Kamran Nasir: The most important factor is that in Pakistan there are only 560 companies that are listed whereas the registered businesses are around 75,000. All these numbers are strikingly low for a country that has over 200 million population ( sixth largest globally).
Furthermore, in Pakistan, companies prefer to raise funds through commercial funding from banks as compared to the stock market, primarily because of ease of access in the banking sector. The unstructured nature of our corporate sector makes it difficult for them to meet the requirements of a highly regulated stock market.
The majority of companies are closely held by families, and they prefer not to make their financial and operational performance public, whereas listed companies are required by law to publish periodic financial reports and material changes.
These families are reluctant to share profits with the public as well, as then they are bound to announce dividends, including to minority shareholders. Generally, these companies believe that meeting the listing requirements of the Stock Exchanges to raise funds far outweigh the benefits they derive out of it due to exposure to stringent regulatory and reporting requirements.
In addition, access to funding from banks in Pakistan has not been easy, because the government itself is the largest borrower, which results in a crowding out effect where small and medium enterprises (SMEs) are deprived of credit availability.
GVS: Is it due to how the stock market works or government policies?
Kamran Nasir: It’s a blend of everything put together. The inefficiency of the capital markets to penetrate into the retail level (Pakistan has only 250,000 investors as compared to India that has over 20 million and Bangladesh that has around 4 million), lack of investor education and to top it all the focus of governments on the development of capital markets is essential to provide ease of access to capital/funding.
The concept of providing an enabling environment to the regulatees in Pakistan has not been adopted. Instead, we have been making laws and regulations as a knee jerk reaction to address a particular problem that persists at a point in time. In my view, SMEs are the backbone of our economy and they should be facilitated in every way. To promote listings at the exchange, the government needs to focus on incentivization and right regulation.
GVS: How can we change this?
Kamran Nasir: The government needs to undertake a comprehensive overhaul of the capital markets and its governance structure and bring in policies that are in line with global standards. The overall objective should be to penetrate the retail segment, which in Pakistan’s capital markets has significantly lagged behind.
There is a need to enhance value associated to the license issued by the SECP to capital market players as currently, the business model of brokerage houses who ultimately will be responsible to focus the retail segment in Pakistan has no Return on Equity.
The ministry of finance has recently created a joint committee for capital market development that has members, including myself, who have provided their detailed input to Asad Umar, the honourable finance minister and now it’s up to the government to adopt them.
Further, there is a dire need to focus on product development which will bring depth to the stock market. Pakistan’s stock market at this point in time offers no real derivative products, as compared to other countries where these products attract the most volumes.
GVS: Is it important to encourage small investors to place their savings in the stock market. How can we encourage the small investor to invest in the stock market – where is the easiest place for him to start?
Kamran Nasir: It is very important to attract retail investors into the stock market. Unfortunately, because of high-interest rates and perception amongst small investors that big investors dominate the market, the retail segment has shied away from the stock market.
For a small investor, investing with a mutual fund would be the easiest place to start because the investor will be able to benefit from the expertise of a specialized fund manager. I believe the regulator needs to invest in retail investor protection programs, which should include effective protect ion policies and educational platforms for investors.
GVS: It is said that in Pakistan, investors really chose between 2 markets – the real estate and the stock market –why has this historically been the case and do you see it continuing?
Kamran Nasir: I think this is a misperception. There are three markets in which investors invest in Pakistan. These are (1) Real Estate (2) Gold and (3) National Savings. The stock market is not amongst the top three. This is mainly because of lack of promotion of the stock market.
In comparison to the stock market, other markets have fewer requirements: for instance, there is no Know Your Customer (KYC). As far as the real estate market is concerned, it is a known fact that the majority of the undocumented money in Pakistan is parked here through loopholes in the legal framework.
An example of such a loophole is the DC rates (at which the transactions are recorded) are way below the actual fair values. At the cost of repetition, I would once again like to emphasize that the government/regulators/exchange will need to focus on drastically expanding into the retail segment in Pakistan and it will require rationalizing the rules and regulations amongst various investment classes especially the real estate/NSS so that in terms of KYC/taxes/fair value these segments come at par with one another and then capital markets will really open up as an investment destination for the retail.
In case this and the business model for the stock market participants is not overhauled then I am afraid these trends will continue in Pakistan.
Read more: GVS exclusive interview with Fereeha Idrees
GVS: Pakistan entered into the emerging market on the MSCI Index (May 31 2017) and the investment pool went up, what does this in layman terms means for Pakistan?
Kamran Nasir: Pakistan re-entered into the MSCI Emerging Markets, which was a testament to the achievements made by the stock market since the 2008 crash. The re-entry enabled a much larger pool of investment in Pakistan. However, Pakistan’s weight in EM Index is minimal.
Hence, so far we have not been able to attract significant foreign inflows during this period. To elaborate, the pool size of MSCI EM is considerably higher as compared to MSCI Frontiers Market that is US$5 trillion vs. US$100 billion. However, Pakistan’s weight in EM is considerably lower (~0.05%) as compared to the MSCI FM (~12%), which results in overall lower allocation towards Pakistan.
GVS: How do you explain the stock market which went up to the entry of MSCI EM reaching a high point of 53,000 and then in the past one year we have just seen the market falling to now around 41,000. What is the reason for this?
Kamran Nasir: There are a number of reasons why the stock market has come down from a high of 53,000 to around 41,000. These include (1) disappointing inflows on the MSCI rebalancing day, (2) political instability and (3) economic concerns, particularly on the external account front. Interestingly all these factors are interlinked.
The economic instability, due to rising international oil price, massive increase in imports and flat exports together with excessive borrowing raised concerns on the fate of PKR vs. USD. In anticipation of the devaluation of PKR, the foreign investors sold their positions in Pakistan, which resulted in an exodus of investors from the market.
The phenomenon of foreign selling was also compounded by rising interest rates in the U.S., which resulted in selling across all emerging markets as hot money started to move back to the U.S.
GVS: What structural reforms in the stock market do you have in mind, to prevent a future stock market crash?
Kamran Nasir: During the 2008 crisis, the systemic risk which is generally assumed as benign had, in fact, become a real risk because leverage in the system remained largely unchecked and unreported, resulting in a spiral effect.
Furthermore, actions taken by the central bank and SECP, as an intervention to control the financial crisis of 2008, ended up exacerbating the meltdown with lasting negative repercussions for the Capital Markets in the years that followed.
All this was compounded by the fact that the global financial markets were in a meltdown in 2008, due to a super commodity cycle. Leading up to 2018, the SECP has put in a very effective framework that will be able to address any such risk when it arises. I believe, structurally the markets are in good shape and in fact overregulated.
GVS: JS Global organizes a yearly international Investment conference. What is the purpose behind this?
Kamran Nasir: For decades Pakistan has lacked positive image building initiatives at the global level. This is one of the major factors behind Pakistan being one of the most misunderstood countries in the world. Policy makers in foreign countries think tanks and a large segment of international investors have minimal exposure to what Pakistan offers as a country and most importantly as a society.
The level of competence that exists in our private sector, the way we encourage and support women participation at all levels, the quality of financial information that Pakistani corporates exhibit (one of the best in the world), the huge potential economic advantages that Pakistan offers as an investment destination and the contribution that Pakistan has made to global peace by being a frontline partner in the war on terror.
Through a great sacrifice of human life and resources, needs to be explained to the world. The modern, dynamic and forward-looking approach of Pakistan – which is the true face of its society – is not well known to the world and this alongside the above has been the fundamental reason why JS Global decided to become the torch bearer in promoting Pakistan globally.
Through these international investment conferences, we promote rising Pakistan image in the backdrop of the potential that China Pakistan Economic Corridor (CPEC) and Pakistan Economy has, in terms of future possible growth considering we are rich in resources and have a great consumer story. The aim is to encourage foreign investment into Pakistan by presenting Pakistan’s potential growth story to international investors.
JS Global, being one of the largest and oldest capital markets firm has a philosophy to pay back to the country, hence we absorb these costs and take the top quality sponsors/ CEOs alongside governments policymakers to promote Pakistan’s image in the world religiously every year with immense success.
The corporate representatives meet with U.S./U.K. policymakers, think tanks and leading global asset managers to share their performances and future strategy reports and present the great economic benefits that are offered in the country. The companies in the Pakistan Stock Exchange offer one of the highest dividend yields and return on equity in the world. The return at our stock market is unparalleled.
Pakistan is one of the fastest growing economies in the world on the back of very strong demographics. All this needs to be told to the international investors. JS Global is the only firm that successfully conducts these conferences every year in the U.S. and U.K. which are one of the most important countries in terms of investment into Pakistan.
In the course of these conferences, the conference partners identify wide range of investment areas in the domestic economy. To sum it up, with the sixth largest population in the world, Pakistan cannot be ignored for long. Given the resources available within the country, it has great potential to become one of the most robust economies of the world.
GVS: What do you find investors are concerned about Pakistan – has the situation improved over time?
Kamran Nasir: The concerns are threefold. These include (1) Economic, (2) Political and (2) Law and Order. These concerns are somewhat mitigating but still largely persist. The Current Account deficit which had gone out of hand to US$2bn/ month has come down to US$1bn/month, but during this time has eaten a significant chunk of our foreign exchange reserves.
The government needs to address structural flaws in the economy quickly and develop an export and import substitution driven model. The power sector needs to be overhauled to address the circular debt while our bleeding Public Sector Enterprises need to be privatized or overhauled to contribute to our economy. Further, the tax net of Pakistan needs to be urgently increased.
On the political front, things have improved. We have seen another democratic exchange of hands, which is a very encouraging sign. I believe democracy has found its foothold in Pakistan and we are now on the road to achieve political maturity over time.
On the law and order front, we have made great strides through very successful operations conducted by Pakistan’s Armed Forces and security agencies which are unprecedented in modern history. We were the frontline state on the war on terror, and we have suffered massively. But thanks to our security forces, we have had exemplary improvement in the law and order situation where Karachi the financial capital of Pakistan is shining again.
GVS: The rupee is expected to be further devalued if Pakistan starts an IMF program, how will this impact the stock market?
Kamran Nasir: Over 50 percent of the market capitalization, the likes of oil and exploration, power, banks, benefit from PKR devaluation. However, sectors like Cement, Autos, Pharmaceutical and Steels will feel the brunt of devaluation as their import cost will increase.
In the lead up to devaluation, foreign investors have been selling their positions to protect themselves from PKR devaluation, resulting in downward pressure on the stock market. The local investors also built positions in USD instead of the stocks, anticipating currency devaluation. There has already been significant rupee devaluation (~32%) in the last 12 months.
Therefore the risk associated with an overvalued currency has been mostly mitigated, which should alleviate foreign investors’ concerns. In the same context, the incumbent government’s plan to seek the balance of payments support from friendly countries and possibly an IMF program would bear fruit gradually in the coming years. This would provide the much anticipated solid footing to the stock market.