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December 2011. Lahore Stock Exchange (LSE ) “Continuous Professional Development”. Pakistan’s Capital Markets: Current Challenges. Presentation by : Muhammad Farid Alam, FCA Chief Executive Officer AKD Securities Limited. Contents. AKD Securities Limited.

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December 2011

Lahore Stock Exchange (LSE)

“Continuous Professional Development”

Pakistan’s Capital Markets:

Current Challenges

Presentation by : Muhammad Farid Alam, FCA

Chief Executive Officer

AKD Securities Limited


Value Proposition

  • The leading stock brokerage in Pakistan, accounting for 6% of average daily volume traded 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 desk comprising of:
      • Commercial, Investment & Islamic Banks
      • Development Financial Institutions
      • Mutual Funds & Investment Companies
      • Corporate Provident & Pension Funds
      • Public & Private Sector Corporations


AKD Securities Limited is a proud recipient of “The Best Equity Brokerage House”Award for the years 2005-06 and 2006–07, awarded by the ‘CFA Association of Pakistan’.

The globally recognized business journal ‘Asia Money’ conducted a survey, focused on the quality of brokerage firms, with renowned international portfolio fund managers and ranked AKD Securities Limited as the 2nd Best Local Brokerage, 2nd Best Overall Country Research, and 3rd Best Overall Sales Services.


AKD Trade

  • First brokerage firm to launch Online Stock Trading Service in 2002, and now a leading franchise in this space
  • Largest customer base with 7,000 registered clients out of a total market size of approximately 19,000 and contribution significantly to overall broking revenues
  • Marketing joint-venture & co-branding with Standard Chartered Bank for their online Priority Banking Clientele which allows immediate funds transfer facility to AKD’s broking account while enjoying the banking facilities of SCB
  • Only online trading service provider with fully dedicated customer call-centre support having trained staff
  • Dedicated research portal enabling online customers to be fully informed about market & corporate developments, with access to reports on par with institutional investors

Investment Banking

  • Successful track record of completing huge capital market transactions
  • Extensive understanding and experience of structuring and executing complex debt & equity transactions
  • Financial strength to commit resources for large underwriting and participation
  • In-depth knowledge of investor demand & appetite
  • Widespread distribution capabilities to a diversified client network through experienced distribution team
  • Close working relationship and credibility with key regulatory agencies
  • Experienced senior resources to ensure swift completion of transactions

We believe that with our in-depth understanding of Pakistan’s capital markets, qualified management, and prior experience, we are best positioned to provide our clients the level of services required for making every transaction a resounding success.


Investment Banking

  • AKDS has assembled a core team of expert professionals with a high level of integrity, financial acumen and industry experience. Driven by young and skilled professionals, the team has initiated and successfully executed transactions unique in structure and size.
  • The team has been involved in numerous Initial Public Offerings, Acquisitions, providing risk capital in underwritings, market-making, various TFC issuances & Asset-back Securitization as well as leading Privatization deals in the country.
  • AKDS was selected as advisor for IPO of UBL by the Government of Pakistan. It was the BUYSIDE advisor 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 sale of stake to The Danone Group, France.
  • The consortium of AKDS, Morgan Stanley and Detusche was mandated as the consultants to the GDR of National Bank of Pakistan (on hold)
  • As Financial Advisors, AKDS has successfully consummated the acquisition of a listed commercial bank by a well known Saudi bank and have acted as Joint Financial Advisors for the 100% Rights Issue of The Bank of Khyber of up to PkR 2,552mn.

The Economy of Pakistan - Snapshot

Note: FY12B is GoP estimates. FY12AKD is AKD Research Estimates



Economic Growth

Growth is expected to come out of the Emerging Markets because all variables i.e. – consumption, savings etc. are at the lower side.

On the other hand the same variables have reached saturation amongst the Developed Markets.





Emerging Markets

Developed Markets








Emerging Markets

Developed Markets

Source: EIU; April 2010



Debt % of GDP

Debt % of GDP

29 DEC 2000 – 31 DEC 2009



Developed Markets





Emerging Markets




\'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

Source: Factset; EIU; April 2010


Capital Market Performance

GDP Growth

Over the past decade total market capitalization’s input in GDP increased phenomenally from 8% in FY01 and kept on growing with its peak during the golden years of 2006 and 2007

KSE Performance (2001 – 2011)


Role of Capital Markets

  • Mobilization of long-term resources (capital raising avenue for corporates) & 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

Advantages of Capital Markets

  • Advantages of capital markets to:
  • Government -
  • Sponsors –
  • Society -
  • Investors -
  • Regulators -

KSE-100 Index at a Glance

During the 90s market movement was sideways ranging between the levels of 1,000 to 2,000

The Decade That Was:

The first decade of 21st century was eventful and saw de-regulation opening up the markets, consolidation, privatization, divestments by GoP worth USD 6.7bn that provided for currency stabilization (MCB – GDR) and later by the cursed domestic and international financial crisis


KSE Market Dynamics – Volatility is an Opportunity

  • The KSE-100 Index has posted a 10 year return CAGR of 25% however volatility has remained high historically. We view this as an opportunity to maximize returns. In view of expected spells of volatility following the sell-off in global markets, we believe proactive management can provide for above average market returns.

Pakistan Market Valuation vs Regional Markets

PER vs. EPS Growth (%)

ROE (%) vs. PBVS (x)

2012 Dividend Yield (%)


Features of Equity Markets in Pakistan

Companies become SICK but Sponsors get HEALTHIER!!!


Flags for 2011-12

Market likely to focus on:

  • Political situation & US relations
  • World economy & stock markets
  • Foreign funding release
  • Central bank’s monetary policy
  • Macroeconomic Performance

Check Points

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


  • Major terrorism event
  • Disruptive political change
  • Weather related agriculture sector failure
  • Commodity price shock
  • Fiscal indiscipline

Is it Bulls or Bears in Pakistan’s Equity Market?

  • KSE-100 can reach 13,750 points by Jun’12 based on target price mapping
  • In absence of any catastrophic event, downside limited by:
    • High dividend yield (2012F: 8.6%)
    • Corporate earnings resilience
    • Largely cash based market
  • Valuation expansion if political risk reduces, economic growth accelerates while monetary easing continues
  • KSE-100 Index can reach 14,250 points by Jun’12 if monetary easing sustains

Fixed Income Market

  • Features
  • Largest market size
  • PkR 7trn M2 + NSS (PkR 6.6trn + PkR 1.7trn) compared to PkR 600bln size of equity market free-float which is less than 8% of fixed income
  • Certain and regular cash flows with lower volatility in comparison to equities
  • Two classes of investors: growing segment of investors with Islamic segment & normal fixed income 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

Fixed Income Market

Source: SBP

The classical theory of positive RIR is now a myth!


Fixed Income Market

  • Outlook of Fixed Income Securities
  • Declining interest rates provide opportunities for higher returns
  • With projection of decreasing interest rate, medium term fixed income instruments look attractive
  • Risks in Fixed Income Securities
  • Interest Rate Risk
  • Reinvestment Risk
  • Credit Risk
  • Event Risk
  • Inflation Risk

Challenges for Capital Markets in Pakistan

Capital markets move with overall economy - rather more sensitive

  • 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 risk and lack of regulatory incentive
  • A required concerted effort by members to revive markets lowering mistrust and rebuilding relationships 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


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 no or lower risk
  • Over/Under-regulation has decoupled the joint mandate of regulation and market development
  • 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 the economy
  • Can Trading and Insider Trading be separated?

Overall Effect = Lowest Ever Volumes


Need for Re-defining Business Model

Comparison of Products ( South Asia vs UK)


Pathway to Glory – Phases Towards Listing

Realization and efforts by all stakeholders to give depth to the market

It is vital for local companies to get listed in the equity markets of our country not only for the enhancement and growth of the markets but also to gain access to a more convenient & robust form of capital raising


KSE – Value & Volume

KSE-100 Index + Volume



Corporate Profitability – Is it intact?

Numerous profit generating corporate entities in Pakistan are facing liquidity dry-outs recently, mainly due to the energy crisis and mounting circular debt

Growth in Earnings is essential but Dividends must increase in the same proportion as well


Challenging Political Environment

  • Friendly Opposition
  • Political parties lack financial and economic expertise
  • PTI talks about revolution; Reality or Over-confidence?

I feel that the failure of Common-Wealth Games and success of China Olympics shows that Democracy may not be the solution to all the ills!


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!!!”

Lessons Learned

The brokerage community in Pakistan was content with plain-vanilla trading services dealing primarily in the Ready Marketwhich led to overdependence on market volumes and vulnerability in the earnings stream.


The Way Forward!!!

  • It has been a tough period for all financial markets since the economic meltdown began 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