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New Year comes with new promises. Mostly unkept by the end of the year if they are made by the sell-side brokerage houses on yearly stock market returns. The strategy reports season is upon us again, and there is no shortage of catchy adjectives telling how the benchmark KSE-100 index at the Pakistan Stock Exchange is massively undervalued by all counts, and how there is a massive return on offer at the bourses.

Only that the strategy reports have more often than not fallen flat as the year progresses. A comparison compiled by stockbrokers Ismail Iqbal Securities shows the KSE-100 has underperformed by an average 20 percentage points annually in the last five years, from market expectations at the start of calendar year. This time around, the street consensus is for 25 percent upside for CY22 – much in line with the 5-year average.

The trailing and leading price-to-earnings multiples are also at multiyear lows, as the listed companies returned the best ever year in terms of profitability growth in 2021. The famous KSE-100 discount to emerging markets at 58 percent is also another mouthwatering aspect, considering steep discount to the long-term 10-year average discount of 35 percent. That said, it has been three years since the KSE-100 index traded at or around the 10-year average emerging market discount. Low P/Es may theoretically entice investors, but recent history suggests there are more factors at play than just earning growth and PEs.

There are already talks of the bulls having made a return to the index, given how just 5 trading sessions of January 2022 have returned better yield than the entire CY21. That said, there is also a “January bias” for whatever reason that leads to a mini bull run at the start of every year. In the last 5 years, January return alone has surpassed the annual return at KSE-100 for all but one year of CY20.

Whether or not the recent momentum translates into a sustained bull rally may depend more on how the secondary market bond yields behave, than the jaw-dropping earning growth and dividend yields on the showcase. A dip from 12 percent to 11.5 percent in 10-year PKRV rates has been responded well at the PSX. With the SBP likely to keep the rates unchanged in the upcoming policy, the bulls may find more legs for a few more weeks. But there is no suggestion yet that the interest rates have peaked, given the inflation outlook. Expect higher bond yields towards the end of 1QCY22 – and the history is decorated enough for everyone to know how the PSX indices behave when that happens.

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