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Karachi, May 13, 2014 (PPI-OT): Strategy: CGT concerns to provide attractive entry point
KASB Securities Limited foresees short-term weakness at the KSE due to significant upcoming hike in the capital gains tax (CGT) from Jul-2014 and the elimination of the “amnesty scheme” for stock market investors.
The hike in CGT will be significant, rising to 17.5% from 10% currently for stocks held less than 6 months, and to 9.5% from 8% if held for more than 6 months but less than 1 year.
However, the impact should be much less pronounced as compared to 2011, when CGT implementation led to plummeting liquidity; average daily value traded fell to a previous 13-year low of US$39mn.
Key is that the withdrawal of the “amnesty scheme” would impact only incremental but not existing liquidity.
Although volumes would be adversely impacted, a correction will provide an attractive entry point, as markets are likely to adjust to the higher CGT a few months down the road.
CGT concerns are back
KASB Securities Limited foresees short-term weakness at the KSE due to significant upcoming hike in the capital gains tax (CGT) and the elimination of the “amnesty scheme” for stock market investors. Unlike 2010/11, the hike in CGT will be significant, rising to 17.5% from 10% currently for stocks held less than 6 months, and to 9.5% from 8% if held for more than 6 months but less than 1 year.
In addition, the “amnesty scheme” introduced in Aril 2012, which promised a 26 month window in which no questions would be asked on source and nature of funds if invested in the stock market for a minimum period of four months will also end in Jun-2014.
Volumes likely to decline
These rule changes are likely to reduce volumes at the KSE, particularly as the increase in CGT on less than six month holding is increasing quite significantly. The initial plan was to increase CGT in a step-wise manner by 2.5% every year from 10% in FY11 to 17.5% by FY15.
However, the presidential ordinance in April 2012 froze the rate at 10% till FY14. It is worth bearing in mind that the CGT applies to individuals, brokers, and corporate entities, but not to banks, mutual funds, foreign intuitional investors, NBFC’s and insurance companies.
…but the impact should be much less pronounced compared to 2011
However, the impact should be much less pronounced as compared to 2011, when CGT implementation led to plummeting liquidity; average daily value traded fell to a 13 year low of US$39mn (pre-2011). In 2011, the main reason for the liquidity shock was reluctance of investors in providing documentation to the FBR, which was addressed satisfactorily by the “amnesty scheme.”
This time around, investors have had ample time to utilize the “amnesty scheme” and any adverse impact may only be to the extent of potential fresh liquidity. The monies that have remained invested in the equity markets will continue to enjoy immunity from FBR questioning.
Correction will provide an attractive entry point
In KASB Securities Limited’s opinion, the equity market has just started to price in the CGT rule changes, and further correction is likely as KASB Securities Limited approaches the federal budget in early June. A correction would provide an attractive entry point, as markets are likely to adjust to the higher CGT a few of months down the road.
The post Morning Shout released by KASB Securities Limited and Economics Research appeared first on Business News Pakistan.