KSE rally: the return of liquidity

There has been no sudden upgrade in the valuation of a majority of the stocks traded on the local bourses. The market has been undervalued for a long time. There has been no overnight change in the macroeconomic indicators; no resolution of issues that contribute to political uncertainty; no mentionable improvement in Pak-US ties. The goras have also not rediscovered the latent potential of this market in recent times. But the Karachi Stock Exchange (KSE) is bullish. And with the index racing past the 13000 level for the first time in almost four years, it appears the bulls are set to run wild for a while. Volumes too have improved much, bringing smiles to the faces of brokers and asset managers alike. The reason for this upward rally and 200 million shares plus volumes is attributable primarily to the resolution of the capital gain tax amongst the KSE, SECP and FBR. This has in turn led to the return of one of the biggest players in the market, who had been absent (and dearly missed) for the past many months. In a nutshell, liquidity has returned to the market and that is what is building its momentum. Those who had been patiently waiting on the sidelines for around two years, watching ambiguities on CGT, afraid of disclosure requirements viewed as draconian gifts of FBR; have regained confidence to bet. Then one of big boys of the market who had been out of the country for long on apparent rift with people in government is back, and an experienced eye watching the KAT screen can catch the mysterious movement in few scrips which were, in the good old days guarded and driven by Mr X. All of a sudden the picture is rosy. Good corporate results are welcomed by punters. Banking stocks are outperforming on robust full years results and slowdown in toxic assets growth is being touted. Construction activities are picking up leading to surging prices of cement bags and stocks alike. Nonetheless, the valuations are still cheap relative to what they were back in 2008 when liquid stocks were trading at PER of 11-12x and even today after a surge of over 10 percent in the index over the past thirty days, PERs of major E&P and banking stocks are below 7x. This is much lower than regional PEs and the discount offered by the Pakistani market is still higher than its average historic discount. Now the market, which is hot and confidence, is soaring. It is about that time in a rally when the me-too customers jump in for the spoils. The rally has so far been based on main board blue chips. Past experience suggests that the second tier kachra items may join the boom soon. And of course that is usually followed by some correction. Markets usually enjoy one rally each year and this seems to be the 2012 rally. The benchmark index may surge past 14000 before June, but it will likely stay dull thereon. While the healthy volumes may be an enticement to buy; history suggests May is the month of corrections. Bottom line: book your profits and do not let greed wash away your gains!