Pakistani Bourse to Decide on Limit After Court Order

By Khalid Qayum and Farhan Sharif

Dec. 13 (Bloomberg) -- The Karachi Stock Exchange, Pakistan’s biggest, will decide later today whether to remove trading limits on shares from Dec. 15 after it reviews a court order that’s reportedly delaying the move, Managing Director Adnan Afridi said.

A judge at Pakistan’s Sindh High Court ordered the lifting of share trading limits to be delayed until at least Dec. 16 after an application filed by a local brokerage, the Business Plus news channel reported, citing the court’s order.

“We will decide only after we have seen the written court order,” Afridi said in a phone interview from Karachi today. The directors of the exchange may meet later today after getting the order, he said.

The trading curbs have prevented stocks from falling below their Aug. 27 closing prices, shielding investors from a record sell-off. The MSCI AC Asia Pacific Index has fallen 31 percent since the restriction was first imposed on Aug. 27. The rupee has fallen more than 21 percent this year, set for its biggest annual decline in more than two decades.

Brokers of Pakistani stocks want the government to support the stock market with a 20 billion rupee ($254 million) fund and provide a mechanism to manage the continuous funding system, or purchasing shares through borrowed funds, before the trading limits are lifted.

Support Fund

“Without the support fund and continuous funding system, there might be defaults by lots of brokers in the first few days,” said Shuja Rizvi, director of broking operations at Capital One Equities in Karachi. The investors and brokers are in no position to return borrowed funds, he said.

Pakistan stocks may decline as much as 50 percent after trading limits are lifted on Dec. 15, almost four months after they were initially imposed amid political upheaval, Citigroup Inc. said. The stock exchange is expected to retain a 5 percent daily trading limit that existed before the curbs were imposed.

“On fears of selling by foreigners and unwinding of leveraged positions, the market is expected to decline by 40 percent to 50 percent from the floor level,” Salman Ali, a Citigroup research director based in Karachi, said in a report yesterday. “The currency may also come under pressure.”

Pakistan will be removed from the MSCI Emerging Markets Index this month because of the restrictions on selling stock, MSCI Inc. said this week. The deletion will take effect at the close of trading on Dec. 31.

Valuations

The Karachi 100 Index now trades at 9.9 times earnings, compared with the MSCI Emerging Markets Index’s 8.3 times. That makes Pakistan Asia’s fourth-most expensive market, tracking benchmarks in China, Japan and New Zealand.

The Karachi 100’s gains diminished this year, after rising 11-fold as Pakistan’s economy expanded at least 4.7 percent a year between the end of 2001 and 2007, as the global credit freeze sent the rupee to a record low, the balance of payments deficit to its widest level ever and inflation to a 30-year high.

The benchmark index has declined 35 percent this year, on course to complete its worst annual performance in 10 years. The emerging markets index has lost 56 percent.

As much as $250 million of index-linked and program-trading funds track Pakistan under the MSCI Emerging Market indexes, representing about 20 percent of the stocks held by foreigners, Merrill Lynch estimated. Deletion from the global benchmarks could force the funds to withdraw from the market.

The price restriction had stalled most trading, leading JPMorgan Chase & Co., the biggest U.S. bank by assets, to end its stock brokerage services in Pakistan last month.

To contact the reporters on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net; Farhan Sharif in Karachi at fsharif2@bloomberg.net