The lure and perils of KSE equities

KSE bulls deserve a pat on their back. Not for successfully marching northwards, but for their persistence to cross the 10,000 level yet again.
After having failed to cross the so-called psychological barrier for the third time since October, the benchmark KSE corrected itself quickly to hit its lowest year-to-date point of 9419 by mid last week.
But the bulls were up and running sooner than market men thought, enabling the index to end the week on a flat note.
The recovery, interestingly, wasn led by domestic investors, who remained on sell side of the counter for the fifth week in a row. Undeterred by this continuous selling, foreign investors, however, remain bullish with an inflow of $24 million in the month to-date - their biggest in the last four months.
Apparently, its the valuations, which is attracting all this foreign money.
Wooed by attractive dividend yields and lower price-to-earning multiple at the local bourse, foreign portfolio inflows have rendered KSE-100 as the one of the top gainers in the region.
By the end of last week, 100-index was up 2.65 percent in CY10 to-date, compared with a decline of 2.69 percent and 7.74 percent in Mumbai and Shangai respectively.
But if valuations are so exciting, then why have local investors sold $57 million worth of equities- including $33.4 million worth of selling by individuals and $18.9 million by funds and NBFCs - at the regular counter since January.
One reason could be that locals tend to better understand their political and economic situation, and hence the nervousness. The other, could be the notion of capital flight - locally termed enami paisa or grey money - that doesn want to be taxed under the soon-to-be-introduced capital gain tax regime.
Market voices suggest that many investors are concerned with the notion that the revenue department will start asking them about the origins of their wealth, when the CGT gets implemented, come July 2010.
Perhaps thats what convinced some investors to believe in the floor talk of 8000 points that spread like a wildfire last week. Though, many don buy the argument, citing the influx of foreign equity investment that can potentially push the index higher, others are still wary.
Some, such as Mohammad Sohail, CEO of Topline Securities, expect the index to remain range bound between 9200-9900 points in the near term; others foresee a slide towards 8500 points, while the most pessimist ones fear 7500.
This might be construed as excessive pessimism. But keeping pure valuations aside, technical indicators suggest that the next move should be rocky and southwards.
Despite the rebound on Thursday and Friday, short-term averages are still weak, implying a slide from this point on with an eye at 9377~9450 in the first move - followed by a potential slip below 9000 points.
This is partly because the longer term direction of the market still rests on the macro-economic drivers.
There is an anxiety about the second round of inflation, coupled with a troubling fiscal imbalance. On the global economic front, few are prepared to rule out the possibility of a double-dip recession, in the wake of sovereign debt default risks and the withdrawal of stimulus packages, if and when that happens.
Yet, don be too amazed if punters try to push it toward summit 10k again; the key is and will remain in market psychology - one that appears to be built on weak nerves.