September 2021 was the worst in terms of returns at KSE-100, since the Covid-induced freefall in March 2020. What is it? Is it the Taliban factor? Is it some US Senate bill that the rumor mill says has dented the confidence? Is it the token 25 bps increase in interest rates and possibly the end of low interest rates era? Is it the worsening current account? Is it the depreciating currency? You can’t pinpoint your finger, but it could well be a combination of all of it. Covid cases have fizzled out, and the negatives appear too large in numbers to outweigh the declining Covid cases and speedy vaccination rollout.
The KSE-100 index breached the 100-day moving average in mid-September, having flirted with it at least thrice since the market rebound after the Covid-induced dip in 4QFY20. The 100-dma had been quite a fortress before the PTI government took office. The economic slowdown of FY19 broke that resistance. But the breach of 100-dma in what are supposedly times of brisk economic growth, after a “market-friendly” budget is more significant. Similarly, the stronger bond with 300-dma is also being put to test as the 100-index meets the 300-dma. Minus the Covid quarter – this is the first time in three years that level is likely to be breached in a declining market.
The index relation with the secondary market yields is the more obvious one. Barring the exceptional peak Covid times, the relationship has stood the test of times for well over a decade. The market was preparing for an upward revision in policy rate, and as soon as the 25-bps increase came, the correction came fast enough to adjust to the higher PKRV yields.
Recall that foreign interest in the market has been dull for quite some time and should well be factored in already. The valuations, if the street consensus is to be believed, are at mouthwatering cheap levels, and everyone should be a buyer. But then, you will hardly ever see the sell-side selling anything but buy calls. Most of the big-ticket sectors have had stellar quarter after quarter in terms of earning growth – shattering all-time highs. None of it has resulted in any re-rating of multiples, which suggests the discount to historical and regional P/Es may well have increased, in the last 12 months or so.
The sectoral movement tells why the market has been unable to take off. The only sector that has outperformed the 100-index is technology since the start of 2021. Cement and automobile kept their noses in front for the earlier part of the year but are now running out of steam. The interest rate reversal is likely to effect demand in both cement and automobile sectors. Banks, despite making record profits, have failed to grab the investors’ attention. Oil & gas sector that has historically rallied with global oil prices too has remained subdued.
It is anyone’s guess where the market goes from here. Valuations are undoubtedly unattractive, and the fundamentals largely appear sound. But the macros, the geopolitical and a potential political battle because of the Pandora’s papers, will likely be what dictate the market from hereon.