Bears’ last mile or two!

Another bad day at Pakistan Stock Exchange (PSX) was yesterday. The benchmark index hit a fresh low in intra-day trade – 30,978 points – and recovered gently in slow trade to end the day at 31,180 points. Brokers attribute yesterday’s fall to weakness in regional and global markets due to growing spat between China and Trump, amid India’s decision to revoke the special status of disputed Kashmir, poor earnings. But frankly, sentiments are so poor these days that if a dove falls dead from the sky in PSX’s parking lot, panic selling might ensue on trading floor.

That is the fact that yields on 3 and 10-year treasury papers are so exciting that fresh investment flows cannot be expected to swarm to equities market. This calls into question the thesis that bears may be on their last mile run as alluded to in this space last week. (See BR Research’s Bears last run? July 29, 2019)

There is no doubt that equity valuations are phenomenal compared to the region. This is why foreigners have not been selling aggressively in local equity market. Between February 2019 and yesterday, during which the market tanked by 10,000 points plus, foreigners only sold a handful; the bulk of the selling was by mutual funds that saw redemptions, a lot of which was reallocated to fixed income.

But consider that average daily trading volume has remained by and large the same between May 2017 to April 2018, and April 2018 to Feb 2019 and Feb 2010 to date. This implies that while prices have fallen sharply leading to sharper fall in KSE-100, smart money has been cherry picking at the bottom. In this year’s leg (Feb-2019 to date), the buyers have mostly been banks and local individuals.

Insurance players have not been taking big positions since February 2019 – as they did between May 2017 to April 2018, and April 2018 to Feb 2019. But they are not selling aggressively either. Surely, being long-term bet makers, insurers are seeing something that others are probably not and therefore sticking to their equity positions instead of reallocating that money to government papers.

There is, however, a risk that companies, who took positions in equity market between May 2017 to April 2018, and April 2018 to Feb 2019, may take a hit on those positions and reallocate that money to government papers. Their board meetings season is in full swing and we will soon find out if companies revisit their investment strategies.

If that happens, the bears last mile may turn into two, spelling bane for the stocks at a time when uncertainty has abated but not really come to an end as the full range of impact of fiscal, monetary, and exchange rate regime changes are understood by the market. But think again, if the market breaks below 30,000 points and hits 28,000, equities would be offering phenomenal returns at those levels, especially considering that interest rates cycle is seen reversing by March 2020.

If the market hits close to 28,000 points, it would be around 43 percent discount to its 500-day moving average. That should be more than sufficient to bring about recovery - not necessarily a springboard recovery as previously alluded but a sustained recovery, nevertheless. Granted that the KSE-100 has previously traded at lower discounts in 2008 and late 90s. But this time may be different.

Although the 2018 balance of payment crises was slated to be worse than 2008’s by brokerage pundits and senior economists alike, but its 2019 now; and we are already into the IMF programme. Whereas the late 90s movement was an outcome of the nuclear test. Despite the recent Kashmir row and exchange at the line of control, war or a nuclear test like scenario doesn’t seem to be the cards. There are of course no sure shot answers at the moment in terms of next 12-month direction of KSE-100. But that’s exactly the kind of situation that separates men from boys.