Chinese entry to diversify PSX’s product portfolios

KARACHI: Chinese entry into the Pakistan stock market is expected to diversify the bourse product portfolios, which are currently attractive to minuscule 0.2 percent of the country’s population, an analyst said on Friday.

“We believe the new manager will take immediate steps to improve the operations as the PSX (Pakistan Stock Exchange) lags behind its regional peers in terms of products, technology and trading activity,” said Zeeshan Afzal, analyst at Insight Securities in a report released on Friday. “The transition will result in improved general public confidence over the exchange as well as possibility of cross-listing.”  On Thursday, a consortium of foreign and local investors won their bid to acquire 40 percent strategic stake in the PSX against Rs8.96 billion ($85 million). China Financial Futures Exchange Company Limited, Shanghai Stock Exchange and Shenzhen Stock Exchange (SSE) will hold 30 percent, while Pak-China Investment Company Limited and Habib Bank Limited each bought five percent stake in the bourse.

SSE is the world’s fourth biggest stock exchange in terms of market capitalisation with 7,631 listed securities and 168 million trading accounts.  Total market capitalization of the exchange is estimated at $6.6 trillion. The market offers trading products, including stocks, bonds, repo bonds, futures and options. In 2015, stocks contributed 50 percent to the total turnover of SSE, while bonds and ETFs and other funds contributed 46 percent and four percent, respectively. However, option contracts have negligible trading value as they were introduced in the last year.

Pakistan’s equity market offers staggering 40 percent return. Trust deficit and small products basket are what analysts termed as the reasons behind uninspiring investor interest in stocks.

“Pakistan stock market penetration stands at meager 0.2 percent as compared to two percent in India, eight percent in Malaysia and 13 percent in China,” said Afzal. “The bourse presently offers only stocks and futures, while, there is no concept of derivatives and exchange trade funds (ETFs).”

In India, options and futures volumes are around 15 times of stock traded value compared to Pakistan’s 0.3 times. India, Korea and Hong Kong come at the top of the table in terms of derivative instruments with $11.4 trillion, $2.5 trillion and $0.5 trillion of annual notional turnover, respectively.

Afzal said the absence of derivatives, like options, bonds and ETFs weakened the capability of the equity market – seeing 80 percent of all the transactions in cash – to sustain the pressure of foreign selling.  

“Lack of liquidity at the PSX has been a major concern for foreign investors over the past decades due to fewer derivatives,” he said. “The market has been unable to absorb foreign selloffs.”