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If AKD Securities’ calculations are any guide, Pakistan’s stock market valuations are rock solid. EPS growth is estimated at 16.45 percent, which is second highest in the region after India that boasts an EPS growth of 17.8 percent. The country’s price to earning multiple is at 7.29x, nearly half of the regional average of 14x, whereas its dividend yields is around 6.9 percent compared to the regional average of 2 percent.

Yet the only thing Pakistan’s equities are receiving is a battering, with foreign portfolio investors flapping their wings out of the country. In FY19 to date FIPI outflows have grown to $58 million whereas for CY18 to date, the net outflow stands at $192 million. In part the gradual strengthening of the USD is causing this outflow, as investors have been pulling money out of emerging markets. Considering that dollar strengthening is not a temporary phenomenon here at home, expect the FIPI pressure to continue at the local bourse.

A more crucial reason, however, is Pakistan’s politics and weakening macroeconomics. In the case of latter is it is especially the external account situation that is widely expected to force the incoming government to knock on IMF’s doors. In the case of former, it is not only pre-election jitters and NAB-bing of former PM Nawaz and is daughter, but also the greater questions of who will form the next government and whether it will be able to prevent the external account from sliding further.

Most leading brokerage houses expect jitters to last until the elections or until the government is formed. BMA Capital for instance wrote late last week that they “view upcoming elections as the key event which may set the tone for economic stability and direction of the market.”

AKD Securities wrote in its July 20th report that “market activity could switch gear down, with investors staying on sidelines till election results. “Post-election, market will react positively to strong mandate irrespective of which political party (PML-N or PTI) takes the lead.” Arif Habib Limited said it expects the market to remain jittery and “politics is to remain the centre of attention till formation of the new government, which will either be with a clear majority or coalition.”

Theoretically, all of that is possible. What is more probable is that jitters will last longer than what most people expect, because elections results will just be the start of a new drama, even if all goes well and there are no complaints of election day rigging, which is a big assumption. At the time of writing this, no party is expected to win enough seats to completely overcome the risks of coalition of its rivals. That means a coalition government or a weak government or both, which in turn means no strong sense of economic direction.

The point being: it is too early to say how long will the jitters last; those who claim jitters will last till the formation of new government should tread with caution. That may have been true historically, but history isn’t always the best guide. Remember that just a few weeks ago brokerage houses were saying that they expected the market to perform better in the upcoming caretaker setup, as has been witnessed during previous regimes. A report showed KSE-100’s performance in the last five caretaker setups where the KSE-100 posted an average increase of 14 percent.

In a response to that argument, BR Research wrote piece titled ‘Caretaking PSX equities’ on May 28, 2018, arguing that this time it will likely be different because this year’s elections are quite different from the yester ones. And that’s what’s happened at least so far: against the 14 percent average gains in caretaker set ups, KSE-100 has been down 4 percent in the caretaker set up to-date.

It’s not always sensible to have expectations, especially when the situation is akin to shooting in the dark. The elections and the rise of secondary market government bond yields are enough reasons to stay cautious for longer than what punters might like to advocate.

Copyright Business Recorder, 2018
 

 

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