Golden star for KSEs 2010 performance

As 2010 comes to an end, brokers at home and abroad are busy making their sales pitches for the year to come. Many have a strong case to present when it comes to the KSE, as the predictions of many have been spot on, silencing the critics who saw a gloomy future in December 2009.
The benchmark KSE rose about 28 percent in the twelve months ending December - and remarkably without active leverage. Absence of leverage led to a decline of around 30 percent year-on-year in average daily trade volume that stood at its 9-year low of about 121 million shares, according to Topline Securities calculations.
But there was another peculiar factor behind the drying volumes: the cornering of OGDC by foreign investors.
Shares of Oil and Gas Development Corporations, that used to be one of the top traded scrip at the countrys main bourse, saw continuous accumulation by foreign portfolio investors, who were led by the Templeton Asset Management.
"Foreigners holding is concentrated in few large stocks. Three stocks (OGDC, MCB and PPL), according to our estimates, make more than 50 percent of foreigners holding of $2.7 billion," a Topline research note pointed out last week.
The impact of foreign investment can be gauged from the fact that sans OGDC, the market rose only about 10 percent during the year.
Data released by the NCCPL show that foreigners bought $526 million worth of shares during the year, as local investors sold profusely from all counters. Local individuals sold worth $78.2 million during the year, mutual funds sold $56.7 million worth of shares, while companies and banks sold shares worth $164 and $88 million respectively during the year.
This clearly asserts the notion that, despite all the bull calls pitched by local brokerage houses, local investors from all facets of the investment community remained net sellers. And the reasons for this were obvious.
While foreign investors were rich in liquidity, especially in the latter half of the year, when the US Fed opted for further quantitative easing, their local counterparts were jittery of the inflation, fiscal deficit and the interest rate environment.
Looking ahead, the story appears similar; fears of hyperinflation, unmanageable fiscal gap, excessive government borrowing and what not, mark the headline news - whereas ample liquidity marks the global financial arena despite regional tightening.
Yet, as brokers make their cases for 2011, the opinions seem divided.
"Our December 2011 KSE 100 index target of 12,300 implies 12 percent potential upside and a conservative 2011E P/E of 7.9x (a 10% discount to the KSE ten-year historical average P/E of 8.7x)," wrote Credit Suisse in its recently released Asia Equity Strategy: 2011 Outlook.
This comes in sharp contrast to Toplines view that wrote, "Recovery in corporate earnings and foreign flows can take Pakistans equity market to 14,000 points in 2011 thereby providing 20 percent estimated gains."
"Our index calculation is based on a 10 percent discount to the last 10-year average PE of 8.0x (ex-OGDC) as this discount justifies economic slowdown, higher inflation, bad governance, fiscal indiscipline and unending inter corporate debt," Toplines note added.
Yet, both sides lack compelling arguments. The P/E discount to the region may not necessarily be the right justification, considering that the fundamentals and the uncertainties involved in those fundamentals are quite different within and outside Pakistans borders. Besides, the higher the uncertainty, the lower the justified P/E would be.
So, the likely advent of leverage in 2011 may provide an impetus to KSEs northward rally, whereas the concentration of foreign inflows in key heavy weight stocks may prevent any sharp slide. But faced with an onslaught of economic uncertainty amidst RGST woes and political bickering, investors would have to have a lot of nerves to get into the market at current levels.