Bears’ last run?

BR Research July 29, 2019

What does Pakistan’s economy stand to lose if the country’s stock exchange is shut down and few restaurants or a sports club is open at its premises instead…after all it’s not as if the stock market has proven to be a vibrant competitive market for raising company finances with huge number of buyers and sellers. These are the kind of existential questions have begun to emerge in trading pits at the bourse. Those who are still hopeful are literally catching at the straws – hoping that the Khan-Trump meeting last week will bear some fruits at the local bourse.

Brokerage BMA Capital said late last week that the “potential receipt of CSF inflow as a consequence of improving relations between USA and Pakistan may also lift investor sentiment”, whereas Arif Habib Limited (AHL) said the “PM’s trip to the US could potentially aid ongoing issues with the FATF which may lure further foreign investment in the country.”

There is no doubt that it’s always good to have good ties with the US, and that on the whole Khan-Trump meeting went very well, and well received by supporters and rivals alike. There is also no doubt that the positive reception of Khan’s US trip comes as a pleasant surprise, which should have lifted market sentiments. But it didn’t. It didn’t, because Pak-US relations haven’t historically affected the KSE-100 – not least on immediate basis, save for exceptional times like ‘with us or against us’.

Recall that this is a market that didn’t even rebound after the much-awaited IMF staff note was released. The reason: because investor worries have gone beyond interest rates, exchange rate, trade & fiscal imbalances. Big money or small – all are closely following the ongoing tax reform, which is causing an existential angst across the business community. (See BR Research’s PSX: bear spell or existential angst July 15, 2019)

Meanwhile, those who haven’t seen their wallets shrink badly are parking their savings in government papers. Yields on 10-year PIB have been on the rise, spelling bane for the equities, as has always been the case. Granted that interest rates have nearly peaked; it has still not necessarily peaked. A hike of another 50 basis points may be seen by December 2019, whereas all eyes are on the CPI revision and whether it truly captures the intricacies of utility prices hikes.

That said those who have both the money to hold long should be getting into the market since the market is currently trading very cheap. According to AHL’s calculations KSE-100 index is currently trading at a price-to-earnings ratio of 6.0x (2020) compared to Asia Pacific average of 13.0x, while offering a dividend yield of about 10.9 percent as against 2.5 percent offered by the region.

However, deep pocket isn’t the only thing one needs to go long at this point. One also needs nerves of steel, since technical analysis suggests that the KSE-100 is just a shock away to nosedive to about 28,000-30,000 points, even if as a short-lived downward spike that can act as a spring at the bottom, paving way for a long and winding recovery henceforth.

Copyright Business Recorder, 2019

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