View
218
Download
0
Category
Preview:
Citation preview
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
1/43
1
Lahore Stock Exchange (LSELahore Stock Exchange (LSE))
Continuous Professional DevelopmentContinuous Professional Development
December 2011
Pakistans Capital Markets:Pakistans Capital Markets:Current ChallengesCurrent Challenges
Presentation by : Muhammad Farid Alam, FCA
Chief Executive Officer
AKD Securities Limited
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
2/43
2
Contents
AKD Securities Limited
Economy & Capital Markets
Equity Market of Pakistan
Debt Market of Pakistan
Challenges for Capital Markets
The Way Forward
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
3/43
3
AKD Securities LimitedAKD Securities Limited
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
4/43
4
Value Proposition
The leading stock brokerage in Pakistan, accounting for 6% of average daily volumetraded on the Karachi Stock Exchange
Ranked among the top 5 brokerage houses
Key broker for foreign institutional investors with over US$1,300 million turnover in
FY06-07 (25% of the total estimates FII turnover)
Member of the Pakistan Mercantile Exchange Limited (PMEX)
Over 100 domestic institutional and high net worth clients handled by institutional deskcomprising of:
Commercial, Investment & Islamic BanksDevelopment Financial InstitutionsMutual Funds & Investment CompaniesCorporate Provident & Pension FundsPublic & Private Sector Corporations
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
5/43
5
Recognition
AKD Securities Limited is a proud recipient of The Best Equi t y Brokerage HouseAwardfor the years 2005-06and 200607, awarded by the CFA Association of Pakistan.
The globally recognized business journal Asia Moneyconducted a survey, focused on thequality of brokerage firms, with renowned international portfolio fund managers and rankedAKD Securities Limited as the 2nd Best Local Brokerage, 2nd Best Overall CountryResearch, and 3rd Best Overall Sales Services.
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
6/43
6
First brokerage firm to launch Online Stock Trading Service in 2002, and now a leadingfranchise in this space
Largest customer base with 7,000 registered clients out of a total market size ofapproximately 19,000 and contribution significantly to overall broking revenues
Marketing joint-venture & co-branding with Standard Chartered Bank for their online PriorityBanking Clientele which allows immediate funds transfer facility to AKDs broking accountwhile enjoying the banking facilities of SCB
Only online trading service provider with fully dedicated customer call-centre support havingtrained staff
Dedicated research portal enabling online customers to be fully informed about market &corporate developments, with access to reports on par with institutional investors
AKD Trade
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
7/43
7
Investment Banking
Successful track record of completinghuge capital market transactions
Extensive understanding and experienceof structuring and executing complexdebt & equity transactions
Financial strength to commit resources
for large underwriting and participation
In-depth knowledge of investor demand& appetite
Widespread distribution capabilities to adiversified client network throughexperienced distribution team
Close working relationship andcredibility with key regulatory agencies
Experienced senior resources to ensureswift completion of transactions
We believe that with our in-depth understanding ofPakistans capital markets, qualified management, andprior experience, we are best positioned to provideour clients the level of services required for makingevery transaction a resounding success.
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
8/43
8
Investment Banking
AKDS has assembled a core team of expert professionals with a high level of integrity, financialacumen and industry experience. Driven by young and skilled professionals, the team has initiatedand successfully executed transactions unique in structure and size.
The team has been involved in numerous Initial Public Offerings, Acquisitions, providing riskcapital in underwritings, market-making, various TFC issuances & Asset-back Securitization aswell as leading Privatization deals in the country.
AKDS was selected as advisor for IPO of UBL by the Government of Pakistan. It was the BUYSIDEadvisor for NRL privatization which was acquired by the Attock Oil Group.
AKDS was also mandated as sell-side advisor to Continental Biscuits Limited for the strategic saleof stake to The Danone Group, France.
The consortium of AKDS, Morgan Stanley and Detusche was mandated as the consultants to theGDR of National Bank of Pakistan (on hold)
As Financial Advisors, AKDS has successfully consummated the acquisition of a listed commercialbank by a well known Saudi bank and have acted as Joint Financial Advisors for the 100% RightsIssue of The Bank of Khyber of up to PkR 2,552mn.
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
9/43
9
Economy & CapitalEconomy & CapitalMarketsMarkets
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
10/43
10
Phase Economy Fiscal Policy Short-TermRates
Asset Class
Initial Recovery Inflation still declining Stimulatory Low / Declining
Cyclical shares,commodities and otherriskier assets
Early Upswing Healthy economic growth
Inflation remains low Moving Up Shares and real estate
Late Upswing Inflation gradually rises Restrictive Rising Bonds, interest rate
sensitive shares
Slowdown Inflation continues toaccelerate Peaking Bonds, interest ratesensitive shares
Recession
Inventory correctionbegins Inflation peaks Production declines
DecliningShares (late in cycle),Commodities (late incycle)
Phases of an Economy
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
11/43
11
Falling Interest Rates Falling Inflation
Expansionary Fiscal Policy Higher Corporate Earnings
Initial Recovery
The Economy of Pakistan
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
12/43
12
Note: FY12B is GoP estimates. FY12AKD is AKD Research Estimates
FY09A FY10A FY11A FY12B FY12AKD
Real GDP growth (%) 1.7 3.8 2.4 4.2 3.50-3.75
Agri growth (%) 4 0.6 1.2 3.4 2.5
Manufacturing growth (%) -3.6 5.5 3.0 3.7 3.0
Services growth (%) 1.7 2.9 4.1 5.1 4.5Federal budget deficit % of GDP 5.3 6.3 5.7 4.0 5.75
Tax to GDP (%) 9.5 10.1 10 10.3 10.3
Average CPI Inflation Rate (%) 20.8 11.7 14.1 12.0 12.1
Foreign direct investments (US$bn) 3.7 2.2 1.5 2.5 1.5
Exports as % of GDP 11.8 11.1 12.7 12.7 12.5
Imports as % of GDP 19.6 17.6 13.6 17.8 18.0
Current Account as % of GDP -5.7 -1.7 0.5 -0.6 -1.03
Inward Remittances (US$bn) 7.8 8.9 11.2 12.2 12.5
Forex reserves (US$bn) 12.4 16.8 17.5 18.0 16.0
Exchange rate (PkR/US$) 66 84 87 88 91.5
External debt % of GDP 29 28 31 32 30
Actual Budgeted Forecasted
The Economy of Pakistan - Snapshot
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
13/43
13
15
% FY20106.0%
5.4% Emerging MarketsDeveloped Markets
5.0%
4.0%
3.0%
2.0%1.7%
1.0%
0.0%Emerging Markets Developed Markets
Source: EIU; April 2010
Economic Growth
Growth is expected to come out of the EmergingMarkets because all variables i.e. consumption,savings etc. are at the lower side.
On the other hand the same variables havereached saturation amongst the DevelopedMarkets.
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
14/43
14
21
Debt % of GDP
90
80
70
60
50
40
29 DEC 2000 31 DEC 2009
30
20'00
Source: Factset; EIU; April 2010
'01 '02 '03 '04 '05 '06 '07 '08 '09
- Developed Markets : G7. Emerging Markets : 87 non-OECD Countries
- Total domestic, external and IMF government debt, as a % of nominal GDP
- Usually but not exclusively central government
Debt % of GDP
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
15/43
15
Over the past decade total marketcapitalizations input in GDP increasedphenomenally from 8% in FY01 and kepton growing with its peak during thegolden years of 2006 and 2007
GDP Growth
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY1
1F
FY1
2F
Manufacturing Agri Services GDP Growth
Capital Market Performance
KSE 100 Index
1,273 2,701
4,4726,218
9,55710,041
14,076
5,865
9,387
12,022
11,557
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Dec01
Dec02
Dec03
Dec04
Dec05
Dec06
Dec07
Dec08
Dec09
Dec10
01-Dec-11
Index
CAGR CY01-CY11 = 25%
KSE Performance (2001 2011)
8% 10%
16%
25%
32%
37%
46%
37%
17% 18% 18.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Market Cap. / GDP
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
16/43
16
Role of Capital Markets
Mobilization of long-term resources (capital raising avenue forcorporates) & investment avenue of investors including retail
Intermediation Function Distribution of these resources &
investments in various viable projects
Mechanism of entry and exit in a quick and transparent manner
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
17/43
17
Advantages of Capital Markets
Advantages of capital markets to:
Government -
Sponsors
Society - Investors -
Regulators -
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
18/43
18
Equity Market ofEquity Market ofPakistanPakistan
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
19/43
19
KSE-100 Index at a Glance
KSE 100 Index
1,273 2,701
4,4726,218
9,55710,041
14,076
5,865
9,387
12,022
11,557
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Dec0
1
Dec0
2
Dec0
3
Dec0
4
Dec0
5
Dec0
6
Dec0
7
Dec0
8
Dec0
9
Dec1
0
01-Dec-1
1
Index
CAGR CY01-CY11 = 25%
During the 90s marketmovement was sidewaysranging between the levelsof 1,000 to 2,000
The Decade That Was:The first decade of 21st
century was eventful andsaw de-regulation openingup the markets,consolidation, privatization,divestments by GoP worthUSD 6.7bnthat provided forcurrency stabilization (MCB GDR) and later by the curseddomestic and internationalfinancial crisis
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
20/43
20
KSE Market Dynamics Volatility is an Opportunity
The KSE-100 Index has posted a 10 year return CAGR of 25% however volatility has remained highhistorically. We view this as an opportunity to maximize returns. In view of expected spells ofvolatility following the sell-off in global markets, we believe proactive management can provide forabove average market returns.
KSE 100 Index CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11*
High 1,550 2,701 4,604 6,218 10,303 12,274 14,815 15,676 9,846 12,031 12,682
Low 1,075 1,273 2,359 4,472 6,218 8,767 10,041 5,865 4,815 9,230 10,842
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
CY % -16% 112% 66% 39% 54% 5% 40% -58% 60% 28% -4%
*CYTD
Difference between KSE-100 High & Low
44%
112%
95%
39%
66%
40%48%
167%
104%
30%17%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Market melt down 2005
and 2008
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
21/43
21
PER vs. EPS Growth (%) ROE (%) vs. PBVS (x)
2012 Dividend Yield (%)
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
6 9 12 15 18 21 24
EPS Growth (%) 2012
PER
(x)2012
Singapore
Hong Kong
Thailand
Malaysia
China
Philippines IndiaIndonesia
Regional Avg.
Pakistan 1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
10 12 14 16 18 20 22
ROE (%) 2012
P/BV(x)2012
Singapore Hong Kong
Thailand
Malaysia
China
Philippines
India
Indonesia
Re ional Av .
Pakistan
8.59
4.16 4.14 4.03 3.633.22 3.12
2.56 2.301.85
-
1.0
2.0
3.0
4.05.0
6.0
7.0
8.0
9.0
10.0
Pakistan
Thailand
Hong
Kong
Malaysia
Singapore
Regional
Avg.
Philippines
Indonesia
China
India
Pakistan Market Valuation vs Regional Markets
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
22/43
22
Features of Equity Markets in Pakistan
Exposure to Corporate Growth
Provides opportunity with some of Pakistans best corporate stories
Inflation Protection
Sale price will increase according to inflation if company will be able to pass through inflation
Liquidity
Ease of entry & exit with market mechanism ensuring availability of buyers and sellers
Higher Returns
The KSE-100 Index has on averaged returned 25% p.a. since Dec01
Ease of Trade
Online trading
Companies become SICKbut Sponsors get HEALTHIER!!!
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
23/43
23
KSE-100 can reach 13,750points by Jun12 based ontarget price mapping
In absence of any catastrophicevent, downside limited by:
High dividend yield(2012F: 8.6%)
Corporate earningsresilience
Largely cash based market
Market likely to focus on:
Political situation & US relations World economy & stock markets Foreign funding release Central banks monetary policy Macroeconomic Performance
Flags for 2011-12
Key drivers to include:
Corporate results & Earnings outlook Interest rate / liquidity trajectory Release of U.S. / multilateral funding Actual vs. FY12 Budget targets
Equity Market regulations
Check Points
Weather related agriculture sector failureCommodity price shockFiscal indiscipline
Major terrorism event Disruptive political change
KEY MACRO RISKS
Valuation expansion if politicalrisk reduces, economic growthaccelerates while monetaryeasing continues
KSE-100 Index can reach14,250 points by Jun12 if
monetary easing sustains
Is it Bulls or Bears in Pakistans Equity Market?
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
24/43
24
Is it Bulls or Bears in Pakistans Equity Market?
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
25/43
25
Debt Market of PakistanDebt Market of Pakistan
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
26/43
26
Features
Largest market size PkR 7trn M2 + NSS (PkR 6.6trn + PkR 1.7trn)
compared to PkR 600bln size of equity marketfree-float which is less than 8% of fixed income
Certain and regular cash flows with lowervolatility in comparison to equities
Two classes of investors: growing segment ofinvestors with Islamic segment & normal fixedincome seekers
Opportunities in Pakistani Fixed Income
Medium to Long term investment: National Saving Certificates Pakistan Investment Bonds
Sukuks Term Finance Certificates
Short term investment: T- Bills Term Deposits in Banks Investor Portfolio Security Account
0
2
4
6
8
1012
14
16
18
Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11
Pakistan Investment Bond Yield
Pakistan InvestmentBond Yield
Fixed Income Market
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
27/43
27
Source:SBP
0
2
4
6
8
10
12
14
Pakistan
USA
UK
ECB
Japan
Australia
China
India
SouthKorea
Malaysia
Indonesia
Thailand
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Policy Rate (%) LHS YoY Inflation (%)
Country Policy Rate (%) YoY Inflation (%)
Pakistan 12 10.90
USA 0-0.25 3.50
UK 0.5 5.00
ECB 1.25 3.00
Japan 0-0.10 -0.20
Australia 4.50 3.50
China 6.56 5.50
India 8.50 10.10
South Korea 3.25 3.90
Malaysia 3.00 3.40
Indonesia 6.00 4.40
Thailand 3.50 4.20
Fixed Income Market
The classical theory of positive RIR is now a myth!
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
28/43
28
Outlook of Fixed Income Securities
Declining interest rates provide opportunities for higher returnsWith projection of decreasing interest rate, medium term fixed
income instruments look attractive
Risks in Fixed Income Securities
Interest Rate RiskReinvestment RiskCredit RiskEvent Risk
Inflation Risk
0
2
4
6
8
10
12
14
16
18
8/20/2008 8/20/2009 8/20/2010 8/20/2011
Pakistan Investment Bond Yield
Pakistan Investment Bond Yield
Fixed Income Market
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
29/43
29
Challenges for CapitalChallenges for CapitalMarketsMarkets
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
30/43
30
Challenges for Capital Markets in Pakistan
Capi t a l market s move wi t h overa l l economy - rat her mor e sensi t ive Lack of confidence amongst sponsors and investors most wiped off
CGT/documentation and high handedness by tax authorities
Poor law & order conditions
Circular debt and energy crisis deteriorating company profitability, cash flow and balance
sheets Inconsistent policy response and reform implementation
Reluctance by sponsors to take viable companies to the stock market with limited response riskand lack of regulatory incentive
A required concerted effort by members to revive markets lowering mistrust and rebuildingrelationships with regulators and stakeholders
People of accomplishment rarely sat back and let things happen to them.
They went out and happened to things.
- Leonardo Da Vinci
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
31/43
31
Challenges for Capital Markets in Pakistan
Market participants have been unable to move past the wait and see approach
Higher interest rate higher return for pensioners and other fixed income investors with noor lower risk
Over/Under-regulation has decoupled the joint mandate of regulation and marketdevelopment
Yet to start-off with Over-The-Counter (OTC) Market
Lack of support by Government of Pakistan in providing enabling environment
Shortage of financial products in comparison to developed markets
Keeping the foreign investor engaged in prevailing tougher economic conditions
Political and social instability has massively damaged and overall confidence level in theeconomy
Can T rad i ng and Insi der T rad i ng be separa t ed?
OverallEffect=LowestEverVolumes
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
32/43
32
South Asia Others3%Trading
2%
Equities
Broking
95%
Need for Re-defining Business Model
UK
Treasury
25%
Interest
Rate
Derivative
20%
Fixed
Income
33%
Others
11%Informatio
n Sales
3%
EquitiesBroking
8%
Comparison of Products ( South Asia vs UK)
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
33/43
33
Pathway to Glory Phases Towards Listing
It is vital for local companies to get listed in the equitymarkets of our country not only for the enhancementand growth of the markets but also to gain access to amore convenient & robust form of capital raising
Year KSE No. of IPOs
Amount Raised
(USD mn)
2007 14,076 10 85
2008 6,037 9 66
2009 9,387 3 17
2010 12,022 6 62
2011 11,762 4 35
32 USD 265mn
Realization andefforts by allstakeholders to givedepth to the market
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
34/43
34
KSE Value & Volume
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
-
100.00
200.00
300.00
400.00
500.00
600.00
Mar-07
Jun-07
Sep-07
Dec-07
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Dec-11
Volume (mn LHS) KSE-100 Index (RHS)
KSE-100 Index + Volume
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
35/43
35
If Volumes Dont Improve
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
36/43
36
Corporate Profitability Is it intact?
ACCOUNTING PROFITS REAL PROFITS
Numerous profit generating corporateentities in Pakistan are facing liquiditydry-outs recently, mainly due to theenergy crisis and mounting circular debt
Growth in Earnings is essential but Dividendsmust increase in the same proportion as well
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
37/43
37
Can Capital Markets Perform Independent of the Economy?
Punjab
Governorassassinat
MENA crisis
escalates
RaymondDavis
issueaffects
Pak-USties
PML-Nparts ways
with PPPin Punjab
MTSlaunched
Additio nal
revenuemeasures
announcedafter IMF
talks
Securities
Lendingand
BorrowingProductlaunched
US says Pakistan notdoing enough tocombat militancy
US forces kill
Osama BinLaden in
Abbottabad
Moodys
givesassurance
on
Pakistanssovereigndebt
FY12 Budget
announced
MQM parts
ways fromcoalition
Selloff inline
with globalequities
DRreduced
by 50bps
Deterioratinglaw & order
in Khi
CPI tumblesdue torebasing
Globalrecession
concerns +US pressureon Pakistan
10,500
11,000
11,500
12,000
12,500
13,000
Jan-11 e -11 pr-11 May-11 Jun-11 u -11 S p-11 Nov-11
US announcesOperation Twist
on globalrecession fears
DR cut by
150bps to12%
FSV benefit
enhanced
Circular debtexposure
converted toGoP se curities
Pak-IMF
Article IVtalks
FBR to examine
source ofinvestment incapital mkts
NATOattacks and
memoscandle
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
38/43
38
Friendly Opposition
Political parties lackfinancial and economic
expertise
PTI talks about revolution;Reality or Over-confidence?
Challenging Political Environment
I feel that the failure of Common-Wealth Games and success of ChinaOlympics shows that Democracy may not be the solution to all the ills!
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
39/43
39
Lessons Learned
Imposition of floor was a disastrous decision
Failure of regulator to save the Non-Banking Financial Institutions (NBFIs)
Monopolistic scenario in the banking sector Capital hoarding Big 5 only protecting their RoE
Enjoying highest banking spreads A few industries were over-leveraged due to which they had to face the music
Success stories like Engro and Nishat need to be respected rather than envied
Over-regulated equity market creates no value
Interfering with market mechanism BACKFIRES!!!
The brokerage community in Pakistan was content withplain-vanilla trading services dealing primarily in theReady Market which led to overdependence on marketvolumes and vulnerability in the earnings stream.
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
40/43
40
The Way Forward???The Way Forward???
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
41/43
41
It has been a tough period for all financial markets since the economic meltdownbegan in 2008, but there is always a new beginning
Integration
Demutualization
IPOs to keep the primary markets alive
De-regulation
New products
Tax structure
Investor awareness
The Way Forward!!!
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
42/43
42
Brokerage House (Member of LSE) Yearly Profit & Loss A/c
NEW OLDNo. of Employees 4 to 5 10 to 13
PKR PKR
Brokerage revenue 1,320,000 4,000,000
Operating Expenses:
Payroll 1,800,000 4,500,000Depreciation 49,500 148,500
Electricity 48,000 150,000
Rent 120,000 240,000
Other Expenses 240,000 480,000Audit & Certification Fee 50,000 150,000
2,307,500 5,668,500
Net Loss Per Annum* (987,500) (1,668,500)
*Excluding certain possible expenses
8/13/2019 Pakistan Capital Market - Current Challenges (Final)
43/43
43
Thank You!!!Thank You!!!
Recommended