Pakistan's equity market witnessed bearish trend during the calendar year 2011 and the KSE-100 index declined by 5.6 percent, or 674.80 points, to close at 11,347.66 points, while average daily volume fell to 13-year low of 79 million shares, the lowest since 1998.
Analysts say that this decline was mainly due to foreigners' selling, weak economic indicators, uncertainty on political front and strained Pak-US relations. The foreign investors withdrew $122 million worth of shares from the equity market during the year 2011.
Faisal Khan, an analyst at Arif Habib, said that this decline was due to net foreign portfolio outflow of $122 million during the year ,and weak sentiment regarding economic environment in Pakistan, political uncertainty, deteriorated law and order situation and strained Pak/US relations.
He said that major regional indices witnessed a decline of approximately 20 percent, due to ongoing European sovereign debt crisis and slowdown in US economic growth, which started to grapple and weaken both developing and emerging economies. This subsequently played into domestic market anxiety and eventually propelled foreign selling.
He said that the companies from chemical sector (Fatima Fertiliser, Fauji Fertiliser Co, Fauji Fertiliser Bin Qasim and Arif Habib Corporation) were in the top 10 gainers during CY11 which kept the chemical sector in limelight. The stock of Fatima Fertiliser (Fatima) yielded a handsome return of 102.1 percent during CY11. Investors favoured Fatima due to commencement of commercial operations, relatively lower gas curtailment and healthy profitability. Fauji Fertiliser Company (FFC) and Unilever Pakistan Foods (UPFL) were second and third yielding returns of 68.4 percent and 64.2 percent, respectively. Media Times (MDTL) and TRG Pakistan (TRG) were worst performers, down by 70.6 percent and 67.8 percent on year-on-year basis, respectively.
He said that liquidity of the market contracted by 35 percent on year-on-year basis with average daily volume of 79.1 million shares during CY11 as compared to 121 million shares in CY10. Lotte Pakistan PTA (LOTPTA) stood out as most liquid stock with average daily volume of 8.3 million shares, and the company posted earnings growth of 148 percent on year-on-year basis. It was followed by Fauji Fertiliser Bin Qasim (FFBL) and Fatima Fertiliser (Fatima) with average daily turnover of 4.4 million and 3.4 million, respectively.
Atif Zafar at JS Global Capital said that Pakistan's equity market witnessed an uninspiring year 2011 as the KSE-100 index declined by 5.6 percent (clipping average gains of 44 percent of previous two years). He said that the bourse outperformed international equity markets by average 4 percent. However, it lagged most other asset classes (Gold, US$, NSS, T-bills, PIBs etc) by a notable 10-20 percent.
The reduced investors' appetite for equities enhanced the appeal for bonds as they searched for safe havens. Interestingly, the appetite for commodities also faded away lately, taking cue from Gold (down 19 percent from its peak on September 6, 2011) and CRB Index (down 18 percent from its peak on April 29, 2011).
He said that the investors remained cautious during the year because of strained relationship between Pakistan and the US, falling popularity of the incumbent government, US debt rating downgrade along with European debt crisis, energy shortfall, collection of Capital Gain Tax and complex and stringent regulation of leverage products by SECP.
He said that foreign investors were the biggest bears of the market, selling $126 million (net) worth of equities during the year. He estimated that the foreigners now hold 29.93 percent ($2.3 billion) of the market's free float, against its recent high of 32.5 percent ($2.8 billion) on May 21, 2011. "We believe rising risk premia on equities owing to gloomy world economic outlook has led to rebalancing of their funds towards fixed income securities", he added.
He said that the foreign portfolio investment witnessed a drawdown from emerging economies during 2011 like India (-$380 million), South Korea (-$8.6 billion), Taiwan (-$9.2 billion) and Thailand (-$167 million). Interestingly, the frontier markets ,like Dubai ($43 million), Abu Dhabi (-$87 million) and Qatar ($742 million), are yet to witness such a large quantum of selling. "We believe the foreigners have opted to drawdown from those countries which either have high fiscal deficit (India) or higher exports to GDP ratio (South Korea, Thailand, Taiwan, Japan etc)", he added.
He said a total of only four offerings were floated in 2011 as opposed to six of last year. These offerings included International Steels, Pakgen Power, Engro Foods and TPL Direct Insurance, raising a cumulative sum of Rs 1.4 billion against Rs 3.3 billion last year - down 58 percent. In terms of value, the offerings were subscribed by 0.75x (0.9x last year).
Moreover, investors' general lack of interest was also reflected in a number of applications filed (12000) against the required number (203000), resulting in total subscription of 0.06x. Engro Foods received the highest response (0.16x), while International Steel received the lowest (0.02x).
He said that among the key sectors, food producers were major outperformers during the year. The sector gained 42 percent against market's decline of 6 percent, led by an increase in value of Nestle and Unilever Pakistan by 51 percent and 28 percent (unadjusted for payouts), respectively. Interestingly, Nestle and Unilever are illiquid heavyweights of the index and it is estimated that the two stocks cumulatively contributed 300 points to the index during the year. The chemicals sector, led by fertiliser stocks, also outperformed the index in 2011. FFC and FFBL benefited from price hikes by Engro due to gas curtailment. The banking sector was the major laggard, with its capitalisation declining by 22 percent due to concerns over further accretions of non-performing loans (NPLs).
The KSE-100 trades at an FY12E PE of 5.8x, a discount of 50 percent to the regional bourses against its historical average of 36 percent. Moreover, it offers an impressive earnings yield of 17 percent, 450bps higher compared to T-bills and a dividend yield of 8.4 percent. However, uncertainty on the domestic political front and bleak outlook on global economies raises the question if there is further downside risk to the market. "We believe it is hard to predict the exact bottom of the market, but looking back at the history, since 1996, we have seen that the KSE has rebounded sharply in the year following a decline", Atif said.
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