Recognising that the KSE benchmark index has more than doubled since January 2009, brokers at BMA Capital posed an important question this week: is there any more room to go up? Ideally, the answer to that lies in the fundamentals, as they aptly pointed out.
KSEs "earning yield should be at a substantial premium to the risk-free rate or there is no compensation for taking equity risk. With the 10-year PIB currently yielding 14 percent, does an earning yield of 13.6 percent present over or under-valuation?" inquired Hamad Aslam, Vice President at BMA while reiterating the need to avoid a blanket exposure in equities.
Though, KSE-100s sharp rise of 2.12 percent last week smacks this thinking, fears of an unprecedented sell-off in a high interest rate/inflationary environment do not seem unwarranted.
Putting equities performance side by side with the 10-year PIB yields, it appears that the KSE is defying its historical trends - the cost of which could be dangerous.
From a chartist perspective, every time the 90-day moving average (DMA) of the 10-year PIB yield starts crossing above its 180-DMA, the KSE-100 starts shredding prices (See graph). In the recent past, it defied this trend once between Jun-Nov 2006, and then between Feb-Apr 2008.
In the first instance, stocks remained uppish, but extremely volatile until the yields on government bond started tapering off. In the second, persistent defiance in the face of rising yield, led to what is now known as the 2008-crisis.
This begs the question, where would the yield be in the remaining part of fiscal year? Amidst all this uncertainty, the only certain answer to that is higher from what is today. Benchmark government bonds yields could potentially rise further by 1-2 percentage points, Nasim Beg, CEO of Arif Habib Investments told BR Research earlier this week.
If Begs fears come true, and if the KSE-100 remains in a denial for another two/three months, then local equities are probably heading towards a 2008-like situation. In turn, this could mean that foreign investors have probably got it wrong again.
"Historically, foreign investors bought at a height; this time, however, they may be right only if they have a long term view; if they have a short to medium term view then they could take a bad hit," says Beg.
So, while the KSE may be able to maintain its trajectory for a few weeks (thanks to the heavy weight stocks cornered by foreign investors), chances are, that the indexs excessive defiance could get a lot of fingers burned. And that could potentially have its own repercussions on the economy and banking system as well.
These risks, therefore, should prompt the SECP to check the real skins of all this gora money that is flowing in, where India-like KYC should be a going reference point to start with.
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