Message Of Chairman

The Economy : The outcomes of the outgoing fiscal year indicate that Pakistan’s upbeat economic momentum remains on track. Economic growth accelerates to 7.0 percent in 2006-07 at the back of robust growth in agriculture, manufacturing and services. Pakistan’s real GDP has grown at an average rate of 7.0 percent per annum during the last five years (2003-07) and over 7.5 percent in the last four year (2004-07) in running. This year’s growth has been broad-based as agriculture, manufacturing and services have grown robustly. The services sector continued to perform strongly for third year in a row and grew by 8.0 percent in 2006-07 as against 9.6 percent last year. Stable inflation is recognized as an integral component of sound macroeconomic policies. More recently, with a pick-up in growth, inflation has started to rise again.

During the fiscal year 2006-07, the SBP took several additional policy measures in different phases as part of monetary policy tightening. In the first phase, the SBP raised the Statutory Liquidity Ratio (SLR) from 15 percent to 18 percent and Cash Reserve Ratio (CRR) for commercial banks from 5 to 7 percent. The SBP also raised the discount rate (policy rate) from 9 percent to 9.5 percent.

Capital Market

It was another year of strong performance marked by strong economic growth, political upheaval and unrest. The Capital Market too reacted to these ups and downs which can be seen in the volatility of the index. But the Pakistan’s Stock Market was able to survive through these periods of unrest which led to an increase in confidence of investors in our Stock Market.

The LSE-25 index opened at 4,379.27 and saw a high of 5,031.21 on October 19, 2006, but closed at 4,849.88, up by 3.74%. The Market Capitalization was Rs.3,859.837 billion at year end as against a Market Capitalization of Rs.2,693.282 billion, an increase of 47.62%. LSE Paid-up Capital has increased from Rs.469.555 billion to Rs.594.592 billion, showing an increase of 26.63%. Annual shares turnover of Regular Market was 8,243.1 million as against Annual Turnover of 15,008.7 million, down by 45%. This decline in volumes is a very alarming situation and requires a prompt action by the Members of Lahore Stock Exchange.

Training Institute and Investor Education

Another major achievement during the year under review is the setting up of Training Institute. The Training Institute was formally launched on October 3rd 2006. The Training Institute is the first and only institute of its kind in Pakistan with primary focus on Capital Markets only. The Institute is conducting courses on Stock Market for Capital Market participants and the response is overwhelming. So far, 7 batches have been trained in different courses related to Stock market. The institute will be offering new courses very shortly.

The LSE Training Institute has also conducted a Workshop on “Understanding Capital Markets” for economic journalists to increase awareness and responsible journalism.

As part of its mission of increasing awareness about the Capital Market in Pakistan, Lahore Stock Exchange is conducting workshops and seminars for the awareness of general public about the Stock Market. LSE is also providing full scholarships to Lahore University of Management Sciences (LUMS) for studies of one undergraduate, one MBA and one PhD student.
The Institute plans to expand its operations through offering new courses for Agents, Investing in Stock Market, Fundamental and Technical Analysis, Derivatives and Mutual Funds.

National Commodity Exchange Limited

The year under review also marks a great step forward in the Pakistan Capital Market structure in the form of National Commodity Exchange Limited (NCEL). All the Stock Exchanges including LSE are stakeholders of NCEL, which is the first demutualized regulated commodity exchange in Pakistan. Formal trading of Gold contract has started and is very well received in the investment community.

Unified Trading Platform

In another trend-setting example, Lahore Stock Exchange and Islamabad Stock Exchange on 30th April joined hands to establish a Unified Trading Platform which will help to bring increased liquidity in the market, improve price discovery, maximize transparency, increase turnover, broaden investor base, curtail risks and distortions in trade, provide cost effective service to the investing public and enhance the image of both the Exchanges. UTS will allow Members of each exchange to trade only in the commonly listed shares or the shares of the companies listed in their respective exchanges. Members of both LSE and ISE shall have an access to bigger pool of liquidity which would result in greater volumes, realistic price discovery mechanism, better surveillance, address the issue of market fragmentation, in relative sense and offer scalability to execute, much bigger trades.

Derivatives

Trading activity at the Future counter of Lahore Stock Exchange has decreased significantly. Future Market volume has almost dried up. The Members and management need to take a serious notice of this trend and need to put forward suggestions as to how this situation can be improved. The inactive “Futures Market” both at LSE and ISE is likely to be activated with more market participants and Joint Steering Committee’s decision to have future trades, without any “excess fee” for first six months, is expected to serve as a catalyst.

Demutualization and Integration

One major step forward taken by international and some of the regional bourses is the demutualization and integration of exchanges. Pakistani exchanges too are in the final stages of demutualization and we expect this to be finalized by the end of this year. An agreement has been signed with Rothschild and Abacus, who will jointly act as our Advisor for the demutualization. Demutualization will give us the room to expand and to take up ventures which are probably not possible in mutualized exchanges. Demutualization will also pave the way for international mergers of exchanges that would be quite beneficial in sharing new ideas and developments.

Future Outlook

With the advent of technology, now around 49% of the trading volume is being generated through remote trading terminals. It is also because of technology that the LSE was able to establish its trading floors in other cities as well. Lahore Stock Exchange has Trading Floors in cities of Faisalabad and Sialkot and is now considering opening trading floors in Multan and Peshawar as well.

Introduction of Index Trading and derivatives products such as Options and Swaps and other products will increase the products offered by the exchange, giving investors more choices and hence increasing trading activity of the exchange.

Integration of the exchanges is also being considered and is likely after demutualization.

Another concept that will help greatly in expanding investor base is cross listings and GDRs. Work is underway in this regard.