KSE: walking a thin line

With the budget finally over, its time to assess how stocks will likely fare in the months to come.
In latest news, a series of positive developments have spurred up; current account is improving, foreign portfolio investors, though a bit resistant, are still pouring in funds, forex reserves are at comfortable level while currency has also somewhat stabilised.
In related news, there have been some positive developments as regards capital gains tax, where reportedly the FBR has waived the condition, for individuals, to file quarterly tax returns while also exempting CGT on the first sale of shares by members of demutualised bourses.
These and the much-marketed cheap valuations and discount to the region should be enough fodder for investors to send the market rocketing upwards sooner or later - especially considering that KSE-100 is currently down nearly 10 percent from its recent high of 10,677 points.
Yet, the word from the trading floor is indecision; and there are plenty of reasons why.
Though, KSE officials are trying to get FBR to allow currency hedging for foreign investors on capital gains tax, nothing concrete has come out of the conference rooms so far.
While that may be a temporary issue, the real snag is that the economy is still fragile.
The weakness mainly comes from stickier-than-expected inflation, concerns over debt sustainability, and a dicey fiscal situation.
This theme has kept money managers on a strong guard so far, and will likely continue to do so, at least until things become clearer over the next six months. And quite naturally, bond yields have already started incorporating these elements in recent weeks.
In addition, uncertainty looms over how will VAT or a reformed version of GST be rolled out, and whether it will yield the desired fruits. In the absence of adequate government revenues, private sector credit counters will remain idle, as the government will likely soak up whatever is available in the credit pool.
And its not as if the market doesn recognise this. Stating that the balance of payment is still fragile, brokers KASB Securities point out that asset prices have largely remained sideways despite progress in macro stability.
"Historically, asset prices have in fact tracked FX reserves. However, empirically this relationship holds with liquidity and growth generating flows," said KASBs research note released on Friday.
Incorporating these swing factors, the market has been aptly volatile, with the average difference between intraday high-low rising to 220 points in June-to-date, compared with 181 points in May and 111 points in the month before. This represents the yawning mood-gap amongst the investing community.
Still, select buying is taking place at lower price levels. Turnover per trade - an indicator that hints towards accumulation in the market - slid to an average 1,290 shares from an average of 1,539 shares seen in KSE-100s last northward rally between March 1 and April 15.
Of course, this doesn mean the market would go up and running anytime soon.
As long as uncertainties persist, the index would likely remain within a broader range of 8,700~10,100 points, with temporary news-based spike in either direction.
And just as downside might be checked by attractive valuations in select scrips, any attempt to crossover the 10,100~10,400 range, will be clipped by the lack of strong momentum on account of lower trading volumes in the CGT regime. Let the tug of war gather steam.