PSX: see-saw might continue

It’s funny how the stock market attracts the attention of electronic media mostly when it’s falling; when the market is roaring, as the KSE-100 did between mid-August 2019 and mid-January 2020, mum’s the word on TV screens. The coronavirus-led fall in equity prices over the last two weeks globally, and last week in particular in the case of Pakistan, has caught media attention once again.

This fear induced selling pressure is perhaps for the right reasons. The World Health Organization has raised global risk from ‘high’ to ‘very high’. Italy, UK, US, Iran, Turkey, and now Pakistan has been gripped in fear. There seems to be more panic at the medical stores than at the bourse, as people throng at the counters hoping to get their hands on surgical and other kinds of masks, even as its prices have jumped by Himalayan proportions. If only a mask seller was listed at the Pakistan Stock Exchange!

Situations likes these are rather tricky because the extent of losses stemming from disruptions in supply chain, and the hit on global demand is difficult to be estimated. There are no neat equations to arrive at perfect estimates; and we all know how fear strikes in the heart of unknowns. Which is precisely why the market seems to have ignored a host of indicative positives over the last two weeks: staff level agreement with the IMF, FATF’s recognition of Pakistan’s efforts, signs of regional peace, lower food prices that may lead to lower inflation in March numbers – all of these seem to have been largely ignored by local players.

But a few factors may prevent the benchmark PSX from falling further. For one, the local bourse is already trading at a steep discount to the region. Which is why re-rating of local market in the case of global corona-led fall can only be expected to a certain degree, even as Pakistan’s P/E multiples have fallen in line with average 7 percent fall in the region. Over the last two weeks regional countries that are well integrated in global value chain saw their price-to-earnings drop noticeably in comparison to Pakistan. But China whose valuations have already been hit hard since the onset of corona were shaved only marginally in the last two weeks.

Second, bonds yields are slipping again. And it almost always spells good fortune for the market. Third, the fall in equities since KSE-100 recent high in mid-January 2020 had mostly been led by oil and gas stocks that are going to be hit by lower oil prices, which may fall further if corona worsens. But as the graphs shows all other major sectors, tracked by BR’s sectoral indices, have actually outperformed the benchmark index. Which implies investors aren’t as fearful as is being perceived; some of them are surely cherry-picking stocks at lower levels.

And lastly, as highlighted earlier, there seems to be a solid support around 37,000-ish levels, which is why the index bounced back sharply on Feb-27 from its intraday low of 36920 points. This doesn’t mean that prices are likely to jump manifolds between now and June.  It’s just that based on current available information, the downside seems limited and consolidation amid wild swings in a defined range seems to be on the cards instead. Unless of course, corona strikes Pakistan and Pakistan’s trading economies in far more severe manner than it currently has. (See also PSX: To panic or not to panic, Feb 11, 2020)