Capital markets are considered to be the key contributor in ensuring the economic prosperity of a country.
These markets provide long term financing opportunities to various entities that trade their stocks. This is where investment and growth opportunities arise and thus set the economic direction for a country.
After a downfall in 2011, Karachi Stock Exchange (KSE), the most crucial and most prominent capital market in Pakistan, was able to turn the tide and since then it has seen exceptional rise in last few years. It is due to the excellent management of the affairs by the KSE administration and also due to the support of the government that the market has been able to make its mark as one of the best performing markets in last few years (with an average return of 41.7% in last three years). The investor friendly initiatives by both KSE and the government made KSE as one of the top 5 best performing capital markets in last three years. The year 2014 saw a real rise in this equity market as the KSE-100 index rose by 27.2%. In this very year KSE was able to achieve a historic milestone with KSE-100 index crossing 30,000 points. Equally welcoming was that the market became less responsive to the external upheavals. Though the whole year was dominated by political bickering and violent insurgencies, KSE-100 index was very less affected by this all and despite small downturns it continued to show promising signs.
This uplift in the stock market is associated with many reasons like fall in oil prices leading to greater amount left for more investment, investment friendly initiatives and others but this all might lead us to wonder if this trend will continue for next few years to come or not. One might also question that if capital markets are considered to be the prominent players in bringing economic prosperity in the country than why is it that the rise in KSE has not been truly reflected in the economic scenario of the country. The fact of the matter is that if this boom in the stock market is to be prolonged for longer time and if we want to see the reflection of this boom in overall state of the economy than we must introduce certain changes that can ensure this. The first possible way to ensure continuation of this boom in the capital market (specifically KSE) is to focus on expanding the investor base. The current investor base is too small as compared to even medium sized and low performing capital markets. Such low investor can lead towards issues like low liquidity and market volatility but can also create problems in terms of inefficient price discovery mechanism. This all can result in a situation where the stock market can find itself all of a sudden in a severe collapse.
This narrow investor base also discourages many prospective and financially sound companies from listing themselves as they feel that this might deprive them from the real incentives of raising long term capital. Thus by working towards increasing the investor base the stock market will not only create greater prospects for a continuous rise but this will also lead towards a more efficient market with far greater opportunities for investment. In addition to this, the government must explore possibilities of introducing provisions or certain mechanisms that promote and ensure the participation of the companies (including MNC’s) in the stock market activities. Various countries around the world have put in place certain provisions that require operating companies in their countries to invest their earnings back into the system while also protecting their earnings and their motives. Such provisions have not only led towards creating possibilities of growth in the economic system by growing company operation but have also resulted in greater involvement of the local and international companies in the stock market activities of that country. This practice with slight changes (for ensuring greater protection for the companies) can also be introduced in our country.
By introducing such mechanisms we will not only ensure a rise in our overall economic situation with expanding operations of the established companies but this will also create more opportunities for trading activities in the stock market. Lastly, when it comes to non-reflection of the rise in the stock market in our overall economic system and broadly speaking in the lives of our masses, the real reason behind this is the non-involvement of our majority population in the activities of the stock market. A country where people are more inclined towards spending than saving this is something that is somewhat obvious. The unaccounted rise in the prices of various commodities and necessities of life are also partially due to this very mindset that we people have. We as a nation are more interested in spending than saving and thus due to this we often find ourselves in a craze of spending unnecessarily and thus creating shortages of supplies that could have been controlled otherwise. There is a need for bringing our masses towards the trend of saving and towards spending with care. In this regard stock markets can be presented as the best option for the masses (at least for those from middle, upper middle and the upper class) for investing their savings.
Both government and the stock market (in this case KSE in particular) must work for creating awareness regarding the importance of saving and regarding the investment and earning opportunities that are available for them through stock markets. A general understanding of the functioning of the stock markets has to be developed and then the stock market activities for facilitating the participation have to be made easily and conveniently accessible for the masses.
Smartphone applications can be developed; e-payment mechanisms and the mechanisms used by banking sector can be adopted for providing easy access to the general public. Though initially this is somewhat difficult to achieve, but if done, can result in a more vibrant and efficient capital market and can also lead towards a more stable, prosperous and an independent economic system. All in all, rather than just enjoying the current joyride of the stock market we must explore the ways for making it long-lasting and for transferring its success into our whole economic system in true sense. For this we must take the game out of the hands of the few to create possibilities for making the capital market equally beneficial for most and also making it easily accessible for the masses. Only by doing this we can ensure long-term success for our capital markets but also can utilize this boom for the prosperity and uplift of our whole economic system.
Author: Adeel Ahmed Khan