KSE-100, Covid and PIB yields

As covid comes full circle in Pakistan, April 2021 may start to look much like the April 2020. Covid is back in the news, agenda, discussions, and discourse. KSE-100’s response to local Covid spread has been an interesting one. The March 2020 selloff was largely on cards due to the global pull out of emerging markets economies, and the lockdown that was in place.

The recovery thereafter even though the cases were only increasing, may show the market disregarded Covid. But bear in mind that much of 2Q-2020 (also termed as the Corona Quarter) was an extreme situation – where inferring trends may not always be the smartest move. But ever since, there has not been a complete disregard of Pakistan’s Covid situation by the traders and investors at the bourse.

As the third wave is well and truly here, the jitters at the index are getting more obvious. Although, a lockdown to the extent of halting industrial activity has been ruled out, restricted movement which will cause reduced commercial activities, is already in place in large parts of the country.

Looking at the KSE-100 returns, you would not guess this is a market that has just returned the best-ever quarterly earnings growth. The kind of price-to-earning re-rating that everyone expected has not really taken place. The market may well be up 23 percent since March last year, but that is primarily regaining the lost ground from the extremities.

What gives is everyone’s question. Part of the answer may lie in the sovereign bond yields, as it has for years immemorable. The Covid distraction may well have taken the sheen off from what has been KSE-100 index movement and 10-year PIB yields. It seems the temporarily lost connection is coming back, as the uptick in yields is keeping the index from running away. The smoothened yield curve would better indicate the trend, as the yield movements in the Covid era were too quick.

While the central bank’s forward guidance may read calm, it still does not read lower yields. If anything, long-term PIB yields are only going to go north from here in the near-term. The bull rallies in the last year have mostly been spearheaded by cement, pharma, and automobile – as the heavyweight banks and E&P sectors have struggled. Should the interest rates move up in the next two quarters, expect some pressure on cement, and automobile stocks – both of whom are believed to be the biggest beneficiaries of low discount rates.