History 37 million rupees. The first index

HistoryKarachiStock Exchange limited formerly known asPakistan Stock Exchange is the only most liquid stock exchange in the country.The Stock Exchange was established on 18th September, 1947 but wasincorporated two years later and had only five companies listed and had a totalpaid-up capital of 37 million rupees.

The first index was introduced when thestock exchange had a listing of 50 companies and was then termed as KSE-50index. The trading system used in the initial stages was the open out-crysystem where professional would gather on the trading floor and transferinformation through shouting and hand signals about the buying and selling ofstocks. Asthe stock exchange started growing, the listed companies were increasingexponentially. This level of growth in the Stock Exchange required an adequaterepresentative index and an immediate need of tracking the trading activitiesthrough developed computer systems was felt. It was on November 1, 1991 thatKSE introduced KSE-100 and introduced a computerized trading system for anefficient buying and selling of stocks. This computerized system was able toperform 1 million trades every day and connected a vast number of users whowanted to be a part of this trading system. Bykeeping the future of index trading in mind KSE introduced an all-share indexin 1995 and by September of that year it was operating on full pace.

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As the investor community was growing two otherindexes were later introduced which were called KSE-30 and KMI-30. PSX in next 5 yearsAlthough it is impossible to predict the PSE for the nextfive years, but we can understand it by looking at the forecasts for thePakistan GDP for the next five years and then break it down for the sectorialanalysis. 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 ofGDP can be linked to the performance of PSE since all the listed companies onPSX are from these sectors.

  Theperformance of PSX will also be understood from the prospective of thepolitical risk in the country. International Investors are more attracted tocountries that have predictable democratic practices.  Pakistan Stock exchange remained one of thebest performing stock markets for a considerably longer period of time.During financial year2016-17, the benchmark index of Pakistan Stock Exchange (PSX) opened the yearat 37,966.76, touched a new high of 52,876.46, slipped to 44,914.45 but finallymanaged to close the year at 46,565.29 points.

According to the economic survey of Pakistan 2016-2017the country’s overall economic growth rate was highest with growth of 5.28percent in the last nine years while last year the growth was 4.51 percent.

Thetotal volume of GDP has crossed 300 billion USD.  The agriculture sector witnessed a growth of3.46 percent as compared to low growth of 0.

27 percent last year while theIndustrial sector also registered a positive growth of 5.02 percent. Largescale manufacturing, which is 80 percent of the total manufacturing in terms ofvolumes also registered a growth of 4.61 percent.

The service sector which hasthe largest share in the GDP among the three sectors also registered animpressive growth of 5.98 percent against 5.55 percent last year.

During theyear 2018 around 10,000 MV of electricity will be added to the national gridfrom CPEC which will be a huge boast for the manufacturing sector. During thelast decade, the economy of Pakistan was plagued by the severe energy crisesand according to the estimates by the state band, the energy crises costsaround 3.5 percent of the GDP. The 56-Billion-dollar Investment by China in theform of CPEC can benefit the economy of Pakistan in coming years as itaddresses the two vital components of the Pakistan’s economy: Energy andInfrastructure. Predictable democratic practices are also considered tobe an important variable for the performance of the stock market. A stableeconomy backed by a strong democracy is preferred by the investors.  The smooth transition from and electedgovernment of PPP to PML (N) is good sign for the democracy and Pakistan ispoised for the elections in the year 2018, and there seems to be no immediatethreat of an army coup. Army has taken strong measures against the terroristsin the tribal areas and Karachi and today Pakistan is much safer than it was 10years back.

The menace of terrorism has been defeated to a much larger extentand peace has been restored in Pakistan.The 50 Billion Dollar project China Pakistan EconomicCorridor will have a great impact of the economy of Pakistan in the nextyears.  The project addresses the twocritical components to the economy of Pakistan: Energy and Infrastructure. Inthe year 2018 around 10,000 MV of electricity will be added to the nationalgrid through CPEC which will boast the manufacturing sector of Pakistan. TheCPEC is investing in cost efficient energy production such as coal, micro hydroplants and nuclear energy.

Coal is being extracted from Thar which will be usedfor the electricity generation. The coal reserves at Thar are estimated to bearound 3 trillion dollars of wealth. Under CPEC 9 special economic zones willbe established in the country. Although some critics argue that theestablishment of special economic zones will give the Chinese manufacturers anunfair advantage and it will cannibalize the existing Industry in Pakistan butin my opinion, the establishment of special economic zones will increase thenet exports and make our Industry more competitive if the Pakistani firms willgo for joint ventures with the Chinese firms. The government of Pakistan needsto draft a comprehensive Industrial policy, which is still not clear to thelocal businessmen.Consumption, Investment and Exports are the main driversof any economy. Pakistani community is a strong consuming community.

Accordingto the last census 63 percent of the total population are below 25 years whichmakes it an attractive destination for consumer products. However, the exportsand 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 GDPof Pakistan. The availability of energy from Pakistan China EconomicCorridor (CPEC) is expected to drive the exports by providing the uninterruptedenergy to the manufacturing facilities.

Since the government of Pakistan haspledged a 17 percent return for the equity financing of the energy projects,the yearly outflows resulting from the equity financing from these projects hasto 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 alsodrive the sectors of the economy such as the transportation.

It is estimatedthat around 8000 trucks will travel on the corridor in a daily basis. CPEC willbe a huge boast for the trucking and warehousing Industry. A bettertransportation network will also decrease the lead times significantly and giveasses to raw materials which will greatly enhance the manufacturing sector. Theroads will connect the remote parts of Balochistan and Gilgit-Baltistanprovince providing access to the raw materials. Tourism Industry will benefit alot from the connectivity.The biggest reason to be optimistic about Pakistan is theChinese investment that is pouring into the country though the Chineseinvestment in the Pakistan stock market is not officially part of the ChinaPakistan Economic Corridor (CPEC) even then more than $55bn inflow is expectedto come into the country in the next five years, according to a forecast fromthe Pakistan Business Council.

What China is doing for Pakistan is whatPakistan cannot do for itself .by providing functioning infrastructure. Themost critical of these involves building power plants to solve the country’sendless energy crises, which has become one of the biggest constraints oneconomic growth. Last year investors secured on to what Chinese investmentmight turn up for Pakistan. The stock market is up more for than 40 per centover the past 12 months, and touched a record high in January. However, itsmomentum has slowed, rising only about 3 per cent this year. Milestones reached In 2002 KSE was declared asthe best performing stock market of the world in the business week. Started in1947 with only 5 companies it had acquired 652 companies in its list by 2009with the capital of Rs 2.

561 Trillion. It was in December 2007 when KSE reacheda pinnacle and closed at 14,814.85 points.Foreign investors startedtaking interest in the growing stock market and as per the SBP the foreigninvestment in the capital market have reached up to US$523 million.

Pakistaniresearch analyst have derived that 20pc of the free float in KSE-100 Index isin the hands of foreign investors. A major milestone wasachieved by the stock exchange when KSE-100 Index exceeded from 15,000 pointsfor the first time ever on record and the 7.4% increase in 2008 made KSE standout among all the emerging markets. There are several more milestones to beachieved by the stock exchange as its board of directors have planned onconstructing a 40-storey building to invite further investments Times of economic recession      Over the years Karachi Stock Exchange havenot only experienced times of great success but failure and crisis have been apart of its successful journey. 2008 and 2009 were the years of economic crisiswhich 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 inthe state bank of Pakistan and resulted in a drastic crash in KSE. Due to thecontinuous crisis faced by the stock exchange in 2008 and 2009 many brokersleft and looked for other jobs.

 Future Performance based on past trendsPakistan’s expected inclusion in the MCSIemerging markets in early 2016 was an important proponent of the KSE boomexperienced before 1st June when the report was due to come out.  On May 25th 2016 KSE ended the dayat an all-time intra-day high of 43,124 points which was 11pc up from January 1st.However, by end of trading on March 31stthe stock exchange closed 12pc down, with net outflows of $81.

7m. Six localcompanies which were expected to be part of the MCSI EM Index traded thehighest with big investors buying up stock in them. by the end of the month thestock prices had risen to unsustainable levels and as the EM funds showedlittle interest in buying shares of these companies these investors began towind down their positions.Speculation plays a major a role in theposition of stock exchanges the world over. The same applies for Pakistan wherepolitical upheaval, global economic conditions and expected industry performanceare the major factors that impact the environment of the Karachi StockExchange.In 2007 following rumors that Martial Law maysoon be imposed KSE gains eroded by 3.

7% and when this news became fact, KSEexperienced similar falls per week. More recently, following the disqualificationof Pakistan’s Prime Minister Nawaz Sharif by the Supreme Court the StockExchange collapsed falling by over 700 points is a minute.These previous incidents are indicative ofthe fact that the Karachi Stock Exchange is highly sensitive to changes inPakistan’s political structure and any indications of upheaval will have aseriously negative impact on trading.

ValidConcerns About Pakistani Markets:Investors are yet to decidewhether CPEC will be long term game changer For Pakistani Markets or It ischina who will be the ultimate Beneficiary from the project.How well are localindustries are going to Get benefited, will local Cement Steel, and HeavyChemical Industries go through an upward trajectory, will there be any ChineseCapital inflows in Cement and Steel.Pakistani Markets will reapbenefit of being local or Chinese Markets earn better because of their terms oftrades and Investments, since many Contracts under CPEC are not Public and thecontracts in Development of Power Sectors that are made public are guaranteedwith the equity returns.Law and Order situation inPakistan this year was quite Better from the preceding years and there wereless Incidents that adversely effected the Stock prices this year with PakistanBeing a part of the war on terror it is still under watchlist.Economic Progress is seemedto 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 isat it 43 years low. Country’s exports are declining and its competitorsBangladesh and Vietnam are growing.

Percentage of Manufacturingis decreasing in GDP and is meagre at around 13% remittances are going downowing to the large layoffs from Saudi Arabia and UAE and Balance of Paymentsare Under pressure.Talent acquisition andManagement is impressive whether at multinationals such as Unilever or localcompanies such as Engro or National foods.The wave of Chineseinvestment will create a huge impact to Pakistan for sure. But it is alsopossible that alongside the power plants, infrastructure roads and ports,China’s investment can leave a trail of bad debts as well.  Sectors that can bePossible Gainers in terms of growth:Cement:Encouraged by consistent domestic demand and government’sfocus on a host of infrastructure projects, the cement industry has planned toincrease its capacity by 26.25 million tons over the next two to three years tosupport a smooth growth of the national economy.The growth trend indicates that in the next twoyears the current production capacity of 46 million tons will be insufficientto meet domestic demand. The industry is making massive investments to add newcapacities.

Analysts are foreseeing that the capacity would increaseto 72.25 million tons in the next two to three years with additional domesticsales of 26 to 28 million tons. Owing to the fact that cement is mosttechnologically advanced industry despite of tariff and non-tariff barriers.The cement consumption is considered a strongbarometer of economic growth.

In the 2016-17 budget, the government increasedtaxes on cement from Rs600 to Rs1,000 along with 17% sales tax. The increasewould take government revenue on cement sales from the previous Rs2,492 to aroundRs3,250 per ton.SteelAs per internationalstandards, every five tons of cement used in infrastructure projects requireone ton of steel. Around ten steel mills are listed on the Pakistan StockExchange (PSX), most of them having entered into the capital market between2011 and 2017.

This represents the highestnumber of new listings during the six-year period in any one sector. Steel companies expect togain supply contracts related to the upcoming infrastructure projects under theCPEC umbrella. These include Orange Line, Karachi-Lahore Motorway andNeelum-Jehlum hydropower project among others.Steel sector watchers saythat 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 CAGRof 14pc.

currently around 45pc ofthe country’s steel requirement is met through imports, local steel playershave significant room for organic growth.According to the WorldSteel 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 steelrequirement is expected to swell over 12m tons taking the country’s per capitarequirement to 62kg by 2019.

Analysts believe that thedemand for steel has been increased by a capital expenditure aimed at capturingthe increase in demand of quality steel products that will come about as aresult of infrastructure projects such as power plants, dams, airports and roadnetworks along with public and private housing schemes.Manufacturing growth led byinvestments in the auto and appliance sector is expected to spike demand forflat steel rolled by International Steels Limited (ISL) and Aisha Steel Limited(ASL).Margins are important forsteel companies. International steel prices have considerably retreated Besides the escalatingdemand for steel in the local market, steel companies are banking on positiveregulatory changes such as an increase in regulatory duty and imposition ofanti-dumping duty.The National TariffCommission (NTC) has imposed anti-dumping duty in the range of 8-19pc on importof CRC, and 6-40pc on import of HDGC, to counter steel being dumped from China.On January 19, the NTCimposed definitive anti-dumping duty in the range of 13.17pc-19.

04pc on importsof Cold Rolled Coils/ Sheets importable from China and Ukraine for a period offive years.Analysts stated in theirJune 7 report that international steel prices have been plummeting sharplysince Mar’17 owing to surging levels of iron ore inventories in China. Iron oreprices, which are down 36pc from March, will likely drag international CRCprices.Key risks associated withthe 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 thegreen back, we flag that such spurts may drag sales growth margins ofAutomobile sectors casting uncertainty for the demand of price elasticvariants.Sharp increase in steel prices and expected volatility inexchange rates and slowdown in economic growth may hamper the growth of thissector.

The fiscal year 2016-17 hasseen an impressive growth in automobile production in Pakistan; According to Pakistan Bureauof Statistics there was 5.39% growth in cars and jeeps from 180,717 units inFY2016 to 190,466 units in FY2017 and 20.74 % increase in the production ofMotorcycles from the position of 2,071,123 units in FY 2016 to 2,500,650 unitsin FY 2017A similar trend of growthwas seen for tractors, trucks, and buses with 54.59%, 36.11%, and 4.49%respectively.The numbers for tractors andbuses were also increased substantially from 34,814 units to 53,975 units, fortrucks the output grew from 5,666 units to 7,712 units, while 1,118 units ofbuses were produced in the FY2017 as compared to 1,070 units in FY2016.While all these vehiclesshowed 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 policyimplemented in Pakistan it paved the way for many new foreign investments, sincelot of new comers have realized the potential in Pakistani Auto markets owingto the fact that the current players like Toyota, Suzuki and Honda have able toaccumulate the huge profit margins.The constant rise in share valueduring the last 5 years and extra ordinary growth in financial development ofAuto companies has made this sector looking very lucrative for the Foreign Playersto in invest billions in the sector.  The use of transport cargounder CPEC Gwadar to kashgar route will not only derive the demand for heavytrawlers /4×4 trucks etc., these vehicles may have to be refueled during the3000km journey hence demand for high Octane fuel and diesel would increase. LSMI witnessed a growth of5.6% during FY2017, with Quantum Index Number (QIN) increasing from 131.

90points to 139.29 points YoY for June-July.Banks:Devaluation in commodity prices jump has firmed up CPItrend. analysts eye at least two rate hikes in 2018to bring policy rate at6.25. Risk of earlier and steeper reversal is contingent on further devaluationand commodity price trends.The Sector will be delivering another high double-digit Advancesgrowth 2018 as economic growth accelerates and commodity prices remains high.

Deposits growth has lagged behind this year estimated at10% the past 4-year trend due to foreign debt repayment. we believe growth inboth M2 and deposits will remain constrained at 10 -12% which may negativelyimpact Banks funding cost.Possibility of imposition of super tax is high which canpose to 5-8% risk to the earnings estimates.Every three out of six banks are facing Capital adequacyratio short fall risk due to imposition of penalty or enhanced capital ratioi.e. 9.4% in 2018.Habib bank appears tobe moving in right Direction to tackle the major challenge of capital erosionfrom supervisory action in US as well as the fact that the Bank of such staturecan easily sustain such jolts.

The bank has rightly focused on the growthstrategy to rebuild capital and operational and balance sheet consolidationwithout compromising too much on growth opportunities. Oil and Gas producers:Rupee devaluation inDec 2017 and strong oil prices have created an environment of stronghydrocarbon pricing for Pakistan E. the impact of both positive trends willbe more visible in 2018.

The Government plansto Auction new blocks may continue to face delays from ongoing tussle betweenfederal and provincial governments for the control exploration and production activities.anearly and clear resolution over the responsibilities might help in clearing theway for materialization of Governments Plan for the Auction on new lease andfuture pick up in drilling activity.Production growth beyond2019aong listed E is becoming scarce due to lack of major big sized finds.Discoveries made over the past few years .2018 should bring big productiongrowth Particularly over Jan -Jun 2018. Power:Pakistan ‘s powerdynamics are changing whereby reliance on Furnace oil has recently gonedown9.1% in Nov 2017 from 5-year historic average of 35% mainly due inductionof 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 includingKAPCO, HUBCO, PKGP are poised to gain from changing power dynamics as theoperate with lower efficiencies than the bench mark levels and consequentlywill incur the lower fuel losses.Increasing Circulardebt has been reported at 450Bn which caused severe cash crunch last yearhowever currently NTDC has now became timely on payment where by cash base ofPower plants will improve slightly, however any one-off payment will remain arisk for the power companies.Given Drop in FXreserves and shifts in GoP ‘s policy to let market forces determines PKR worthagainst Dollar, another round of PKR Devaluation is expected, Power companiesmay benefit from this as their unique tariff structure provides a natural hedgeto PKR devaluation


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