Bullish in Karachi
The Karachi
stock exchange keeps setting records. For the week
of February 14 the KSE-100 index surged over almost
500 points and closed at 7734. In the summer of
2003, when the index broke 4000, this column predicted
that with good economic management the index could
break 7000 within two years. It looks like we will
break 8000. The Pakistani stock market has been
the place to put money since 9/11, when it was trading
at a level of about 1250.
The market has climbed a wall of worry the whole
way. I remember a terrible article in Fortune magazine
that ran in the Spring of 2002 that trashed Pakistan
and its stock market. They certainly did a disservice
to their readers.
Why is the market doing so well? Several factors
are in play. First is that the market was profoundly
undervalued in 2001. Stocks had been depressed for
years due to the accumulated effects of the mismanagement
of the 90’s and the flight of capital. The
reforms of Shaukat Aziz and Musharraf had yet to
bear much fruit, and the agricultural economy was
stunted by Pakistan’s worst drought in its
history.
But reforms were gathering pace, and industrial
production had already started to rise in 2001.
Inflation was low, and foreign exchange reserves
had already doubled when 9/11 struck. The immediate
impact was negative, but the long-term result was
a significant improvement in relations with the
West, and removal of the American sanctions.
The stock market responded to these events. Stocks
doubled in the 12 months after 9/11 and kept going
straight up, with only the occasional short-lived
correction. The economy then began to surge. Good
economic management, in particular a sharp reduction
in the debt burden due to rescheduling of the debts,
stimulated growth, as did a whole series of other
reforms. In fiscal 2002, the economy grew 5.2%,
and in 2003 this accelerated to 6.5%. This year
the economy is heading for over 7% growth, with
industrial expansion at 17%. Pakistan’s growth
is being led by vibrant expansion of industry, which
is a very healthy trend.
The other major stimulus to the stock market and
the economy has been privatization. The selling-off
of government owned companies has been a major success
of the Musharraf era. The biggest achievement was
the transfer of 85% of the banking sector into private
hands. This has led to a huge growth in the efficiency
of the banks and their ability to provide the credit
necessary to the private sector to finance growth.
Credit from the banks has hit all-time records.
Privatized state companies also represent investment
opportunities for stockholders. The company shares
are snapped up and prices driven higher in anticipation
that private owners will run the firms more efficiently
and with larger profit.
Over the next two years there is still a large portfolio
of major government companies that need to be privatized.
These include the 11 firms that arose from the recent
breakup of WAPDA (8 electric supply companies and
3 distribution companies), the energy companies
such as PPL, PSO, OGDCL, and both of the natural
gas firms, the phone company PTCL, PIA, Pakistan
Railways, and Pakistan Steel. Several of these firms,
in particular PTCL, PSO, and PPL are slated to be
sold by June. Sales of PTCL and PSO have been announced
several times before, only to be put off. Hopefully,
the government will carry out the transaction this
time.
How much higher can the market go? At this point
the market capitalization, the dollar value of all
the companies based on current stock prices, is
35 billion, which is still a meager 33% of GDP.
In developed markets, market cap can reach 100%
of GDP. So based on this, we still have room to
grow. Prime Minister Shaukat Aziz announced last
week that the economy is now set to grow 8% per
year for the next several years. If that is true,
and if the government does in fact follow through
with the privatization program, the KSE 100 will
break 15,000 by the summer of 2008.
