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The benchmark Pakistan Stock Exchange swung wildly yesterday. In early trade, the KSE-100 had hit its 52-week low of 32,352 points. But if day-end summaries of brokerage houses are any guide, value hunters dived-in to capitalise at lower price level. The index eventually closed about 84 points up at 33,250, reflecting a recovery of nearly 900 points. Does that mean the benchmark index has found its bottom?

The answer to that question depends on whether or not the government decides to bail out the market by launching the NIT-led fund of Rs17-20 billion. If that folly sees the light of the day, then 32,352 points may well be the bottom, or near-bottom with the downside limited to around 31,000 – a level where index may be at a price-to-earning ratio of about 5.5x.

The amount in question translates to about $120-135 million, which is nearly 2.5 times the amount of net foreign portfolio investments received in CY19 to-date. That plus other changes in investment regulations may help the market find its bottom, if it hasn’t found it already at the low hit yesterday.

However, if stocks are not given the artificial support through a bailout fund and the government adopts the policy of ‘market-based equity pricing’ as it is adopting a ‘market-based exchange rate’, then expect the bottom to fall further.

In terms of volume, trading is likely to remain dull until the end of Ramadan, following which cricket World Cup is due to begin. Starting from the end of this month, and likely to be relevant until at least the end of June, the World Cup fever will keep trading volumes at bay as it has in the past. And without volumes, bulls will struggle to cross resistance levels. (See BR Research’s piece titled ‘The World Cup volumes, March 26, 2015)

The World Cup also means that a significant portion of prime-time media audience will be diverted away from both economics and politics. This gives some breathing space to the incumbent government to pull up their socks, as the opposition’s Iftar-revolution cannot be rationally expected until the World Cup end or the Pakistani team is ousted from the game, whichever comes earlier. Unless, perhaps the opposition parties think they pull off an anti-government pressure during the World Cup.

That said, while political worries may be a little further down the road and not really after Eid as is being touted, and in fact may not even be a great worry since PML-N and the PPP don’t seem to have the necessary street power, politics is a funny business. Anything could happen between now and then; there is a reason why they say a week is a long time in politics.

Amid this backdrop, the standard pre-budget uncertainties over and above uncertainties relating to the IMF programme should keep PSX bulls hesitant, if not at bay. The language of yesterday’s monetary policy statement seems quite hawkish, leading one to believe that another round of tightening is to come.

“A greater reliance on central bank financing of the deficit has acted to dilute the impact of previous monetary tightening.” Inflation is “anticipated to be considerably higher in FY20”. “The inflation outlook suggests a fall in real interest rates on a forward-looking basis.” These are some of quotes from yesterday’s MPS that suggest that the central bank is going to be hawkish two months onward as well.

In such a scenario, what may seem to be oversold at the bourse right now, may not be so in reality. For when earnings take a hit, price-to-earnings will also have to be re-rated. Already yesterday’s rate hike was higher than the consensus among equity brokers who were expecting a hike of 100 bps, and had accordingly priced it in. The additional 50 bps and the tone of yesterday’s MPS note should demand a reconsideration of the ‘oversold’ thesis.

The earning yield on debt papers is rising, whereas that on equities is falling. Some of the big stocks such as PSO, NCL, NML, DGKC and other ARE expected to “be major losers given the higher quantum of debt in their capital structure”, according to analyses by Arif Habib Limited. “Companies with high dividend yield (DY) may also struggle in the rising interest rate scenario amid lower relative appeal as compared to return on bank deposits,” AHL adds. In light of these factors, in case the government lets the market be, and decides not to give a bailout, don’t be surprised if the KSE-100 slips below 30,000 eyeing 28,000 points. Buyers, beware! (For detailed background to current market behaviour: see also BR Research Game of nerves: the plot thickens, January 21, 2019)


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