Financial Journalist

South China Morning Post

In the 12 months to April this year, the Pakistan stock index climbed by about 100 per cent. GERRY O’KANE reports.

PAKISTAN as a nation-state is much like its emerging stock market: youthful and volatile but promising. Since April last year when the stock exchanges of Lahore and Karachi opened their doors to international trading, the adventurous investor has seen a handsome return on his money.The Pakistan stock index has climbed — until April by about 100 percent, taking on all competitors worldwide. “The market had a strong beginning in April, when it opened” said Mr Henry Thornton, the manager of asset management with Credit Lyonnaise in Hongkong.

“It went straight up until June and then there wasn’t much activity until October again.

“But between November and December it rose again and our fund has been looking at a good percentage increase in US dollar terms since it began, even outperforming the index.”

April saw the market slip back but June and July has seen recovery, although not at the pre-April levels. Mr Thornton believed that an encouraging budget in May helped, and the recent vote of confidence in the policies of the finance minister would help even more in the market’s recovery.

The volatility of the market is not surprising because it is a recognised characteristic of most emerging markets.

Analysts have said one reason for this volatility has been a batch of the regulations facing international investors.

In recognition of this, custodians and fund managers have been lobbying the regulatory authorities to change some of the rules and this has had some significant effects.

“One of the big problems that faced the institutions investing there were the regulations and methods of registering shares,” said Mr Peter Fletcher of the Bank of Bermuda, and who is responsible for global custody for fund investors like Credit Lyonnaise and G.T. Management.

“In reality, settlement wasn’t an issue but, unlike local investors, foreigners had to re-register shares irnmediately and this was causing corporate liquidity problems.”

Under the statutes, re-registration had to take place within 45 days but many companies seemed to interpret the rule as “not less than 45 days”. Re-registration frequently took longer and the subcustodial operators at Citibank in Karachi officially complained that it had taken up to 114 days in some cases. The problem usually stemmed from the method of registration. Automated signature machincs were not recognised, share lots came in a maximum of 100 with each lot requiring two sets of company signatures and duty stamps which had to be individually attached and were not in the needed 15 rupee (about HK$3.35) amounts.

In terms of man-hours to physically meet the legal requirements, delays were bound to be interminable.

“The government officials were very helpful when we explained the problems,” Mr Fletcher said.

Several of the suggested solutions were accepted by the Corporate Law Authority, including a reduction in registration time from 45 days to 30 and the introduction of automated franking. Apart from the 30-day rule, Pakistan has scrapped the need for foreigners to register their stock unless they are collecting dividends, although Mr Thornton said he could name some companies which still did not comply.

Paradoxically, the same issues have helped boost confidence in Pakistan’s potential.

“The situation was completely unlike Indonesia when it discovered problems. The authorities in Pakistan, when we brought them our problems, then asked us: ‘what should we do?’

“And within a month they began to implement some suggestions. That is going to be the key part of their success,” Mr Thornton said. There is little doubt that much of the market’s recent success has been a result of the breathtaking pace of economic reform which has been introduced by Prime Minister Mr Nawaz Sharif.

Formerly an industrialist, Mr Sharif and his Islami Jamoori Ittehad Party have been driving home his “3D” policy: denationalisation, disinvestment and deregulation.

Pakistan stock index