Brownie points shrinking for KSE

Talk about timing. After marking its 20-month plus high of 11,206 on Monday last week, the KSE-100 saw signs of waning momentum.
The benchmark index moved back and forth in a tight range of 11,262 (intra-week high) and 11,123 points (intra-week low) with volumes dropping to an average 85 million shares on Thursday and Friday from an average 131 million shares traded in the preceding days of November.
This, just before the monetary policy decision (due today), raises an important question: were market participants becoming wary of the policy rate? The answer would be an outright
o, if the local brokerage community is to be believed.
"KSE seems to have priced in the DR hike," said an Invest Finance Securities note last week, adding that "it will be interesting to see the movement in yields when the government looks to borrow long-term through PIBs and the subsequent impact on rates of return for NSS instruments."
While a majority of market participants expect a 50 basis point hike in the discount rate, Muzzamil Aslam of JS Global sees a status quo. "The SBP will prefer to wait and keep the policy rate intact on grounds of the governments renewed effort on raising tax revenues, thereby restricting the fiscal deficit at around 5 percentage point level, a contained external deficit, subdued private off take, and almost zero real interest rates," wrote Aslam.
The loss of momentum could then be attributed to the indexs historical resistance around 11,200~11,500 points and the need to undergo a healthy correction after a largely unchecked rise since late August.
Or perhaps there are bigger worries - bigger than the rate hike. Developments on infrastructure investment through public-private-partnership, the restructuring of PSEs, recovery in the external account balance and the passing of RGST in the Senate may hope triggers for some.
But anybody who has followed Pakistans economic governance would agree that the glass half full on these fronts would be a very romantic view of economic life.
Developments on infrastructure and PSEs appear tortoise-paced at best. Similarly, the recovery in the external account isn sure shot sustainable - sans the rise in remittance inflows. Rising commodity prices can easily balloon the import bill, whereas troubles in the eurozone and the US can potentially hurt Pakistans exports.
As for the RGST, it will be very painful, by the very nature of reforms. This is if RGST is successfully implemented. If it is not implemented in full letter and spirit then Pakistan would have troubles dealing with the IMF and the world at large in no uncertain terms. Of course, all this is in addition to the inflationary risks.
Quite naturally, local investors have been busy booking profits at higher prices, despite all the buy calls by local brokers.
Foreign portfolio investors bought $36.9 million (net) worth of shares at the KSE in the month to date; just last week foreigners poured in some $12 million when half of the supply came from local mutual funds. It is, therefore, up to the foreign investors to take the market where they want.
The quantitative easing in the west and Pakistans equities discount to the region are two of the major drivers of foreign portfolio inflows. If these inflows remain strong then even 12000 points would seem just another milestone. But if the inflows ease, then a hard landing may be on the cards.
The markets uncertain behaviour last week, rising interest in small cap stocks and decreasing room for further foreign inflows due to gradual cornering of big floated chips are sufficient reasons to be concerned.