The celebrations of the best performing market in Asia are long since over for the Pakistan equity market which has been down in the dumps since May this year.

After providing mouth-watering returns of 46 per cent in 2016, the market continued to rally until the KSE-100 index hit an intra-day high of 53,124 points on May 25.

Stock brokers and analysts who were projecting the Index would hit 56,000 points by the end of 2017 gasped for breath as it took a sudden turn for the worse. In the five months since then, the index has plunged by an agonising 11,715 points, or 22pc, pushing investors into heavy losses.

It all started with an unfavourable budget, followed by the unexpected debacle of the country’s reclassification into the MSCI emerging-market index. Adding deteriorating economic numbers and political uncertainty into the mixture created a perfect recipe for a bear market.

But for all that, the Pakistan stock market has always been the victim of disconcerting fault lines that no one wants to talk about when good times are rolling.

Lack of depth

The total number of listed companies is as few as 562 against a registered 150,000. Surplus liquidity in the market is therefore chasing few shares. There is hardly any incentive for companies to go public.

On the other hand, quoted companies are subject to strict regulations and meet the demands of ‘code of corporate governance’. Unlike in the mid-90s, when on average 25 new initial public offerings (IPOs) were floated, there are more de-listings than listings at present.

The Pakistan stock market has always been the victim of disconcerting fault lines that no one wants to talk about when good times are rolling

At least half a dozen IPOs were in the pipelines for 2017, but sensing unfavourable conditions, sponsors have put them on hold.

As sponsors of listed companies continue to hold overwhelming number of paid-up shares, the PSX proposed a year ago to ask listed firms to maintain their float at 25pc of the paid-up capital within the next three years.

According to available information, close to one-third of listed companies has share float of less than 25pc.

Unprotected small investors

Along with the low number of quoted companies, the number of investors in the market has remained abysmally small.

In a population of around 200 million, fewer than 500,000 are in the business of shares, and an even lower number represent high-net-worth individuals.

Contrary to the market regulators’ oft-repeated claims, no serious effort has been made to attract larger public participation in stock trading.

The privatisation of state-owned entities, which not only provides a larger free float in the market but also gives small investors a means of making money by subscribing to IPOs, stands stalled.

Small investors and day-traders should also be protected from misleading brokers and the new breed of ‘gurus’ and ‘investment advisers’ who have sprouted on social media — mainly Facebook and WhatsApp.

The flawed KSE-100 index

In the benchmark KSE-100 index, stocks which can be counted on the fingers of one hand can turn the tide owing to their greater weightage in the index.

Much of the current market meltdown has been predicated by stocks which were candidates for entry into the MSCI emerging-market index: UBL, HBL, Lucky Cement, MCB, Engro Corporation and OGDC. Since their combined weightage in the benchmark 100-share index is as much as 70pc, they dragged the entire market down when they sank.

The introduction of market capitalisation based KSE-30 index has failed to grab investors’ attention even after over a decade of its introduction, even though the index is more representative of the market.

Market capitalisation is based only on the ‘free-float’ of shares, rather than on the basis of paid-up capital. Due to this reason the ‘over-representation’ of any sector is reduced in the KSE-30 index.

Absence of new products

The Pakistani market offers just two products as a trading platform: ready market and single-stock deliverable futures.

While there are two other products, index futures and cash settled product, the complexities in trading drive investors away.

With the induction of Chinese strategic investors, comprising three Chinese exchanges — China Financial Futures Exchange Company Limited (lead bidder), Shanghai Stock Exchange and Shenzhen Stock Exchange, who now hold 30pc strategic holdings in the PSX along with the management — investors have been looking forward to a quick introduction of products such as options and derivatives.

Sources suggest that the work on a ‘business plan’ is being conducted by a leading international firm but nothing has emerged so far.

Unfair trading practices

It has to be conceded that the regulators have come down with a heavy hand on some unfair trade practices, such as insider trading, front running and misdeclaration by brokerages in their research reports.

Yet, the menace has not been eradicated. Investors also complain of ‘data leakages’ which need to be plugged where ‘material information’ reaches some big investors before general investors.

Published in Dawn, The Business and Finance Weekly, October 30th, 2017