In an exercise of self-congratulations, various stakeholders of Pakistan Stock Exchange - investors, TREC holders, managers, regulators – are all too excited about Pakistan being rated as Asia’s best and the world’s fourth best performing market. A few politicians from the treasury benches have also tweeted about it too.
Somehow, every so often, the rise in Pakistani equities takes away the spotlight from the more important metrics - market depth, breadth, capital formation, number of investors and so forth - where Pakistan is arguably the worst performing or at least among the worst performing markets. But let’s focus on the shine for the moment.
With average weekly trading volume rising to levels not seen since the year 2005, the benchmark Pakistan Stock Exchange, KSE-100, closed at 42,023 points last week posting a weekly gain of about 2.4 percent. The index is now at its pre-Covid peak marked by the end of January 2020 following its meteoric rise from its August 2019 bottom.
A host of factors account for the sharp growth in KSE-100. A few feel-good factors such as relatively better external account situation; FBR’s tax collection being largely on the mark (for now); the continuation of a miraculous fall in Pakistan’s Covid cases/deaths the reasons of which are still not known with a degree of certainty; and slight progress on a few privatization transactions in the pipeline. These are feel-good factors, not only because these are all green shoots, but also because there are still question marks over the sustainability of these improvements.
Perhaps the biggest reason driving equities these days is higher liquidity and an earnings differential that favours shares rather than government bonds. A T-Bill auction is due this week, which may give some sense of direction of how bank treasurers are viewing the macroeconomic situation especially vis-à-vis fiscal, monetary and inflationary affairs. But don’t expect that auction to take away the punchbowl from the party that’s being going on at the equities bourse.
With Pakistan’s price to earning yields at 7.5x against at regional average of 18.4x, according to brokerage Arif Habib Limited, and a dividend yield of 6 percent against regional average 2.7 percent, there seems to be further upside room. And if the PM announces any development package for Karachi over his weekend visit to the city, that may also improve market sentiments.
This is not because Karachi is listed on the bourse (frankly if it was, it would have probably been on the bourse’s defaulter counter). But because Karachi has a big industrial base, and any improvement in the lives and livelihood of Karachi can help increase overall business environment in the country. Besides, everybody knows that when overall sentiments are positive, the market looks for excuses for rally up, even when those excuses make no sense. Be that as it may, as argued last month, whether the KSE-100 should be expected to hit its near-to-medium term peak at P/E of 9x, 10x or 12x is a discussion worth having.