Consistent mistakes necessitate consistent reminders. A person glued to an estranged lover needs to be told of the bitter reality time and again. And for his/her good, a denial would eventually leave him with burnt fingers.
Yet, and despite repeated cautionary notes here in these columns and elsewhere by other rare skeptics, investors at KSE are almost magnetized by the so-called attractive valuations, which will supposedly ride the benchmark index to 10,000-plus levels.
Makes one wonder, whats with the number: 10,000, 10,700, 11,000, 11,300 or other key levels, the industry often cites. Isn finding the right value supposed to be done through pricing-in the probability-weighted fundamentals?
A few months ago, BR Research spoke with a certain Head of Research (agreed, he was one of those newly promoted young chaps) who candidly accepted that back in the summer of 2008, the industry failed to incorporate the caveats required in the overall macroeconomic and stock-specific projection models. Well! It appears the industry is repeating the same mistake.
In isolation, the markets price-to-earnings multiples, a key measure of valuation, are surely attractive.
At 7.0x-7.3x, KSE-100s P/E ratio is roughly at 45 percent discount to Asia-ex-Japan region, according to Invest and Finance Securities most recent analysis. It is also at over 30 percent discount to its historical P/E of 10x~10.5x. From a more salivating view point, the index is at more than the 40 percent discount to its historical average, when the multiple of the OGDC, the heaviest-weighted stock, is excluded from the benchmark index. "Without the OGDC, the market looks more attractive", Topline Securities proclaimed about a fortnight ago.
But as Khalid Iqbal Siddiqui, Director Research of Invest and Finance Securities aptly pointed out last week, "Todays 7.0x P/E comes with a set of much more uncertain earnings estimates". And this uncertainty is everywhere; be it the economic climate of the West or the environment at home, both are hazy.
Of course, the domestic situation is even more confusing, no thanks to the floods, fears of another interest rate hike, the dispute over the margin trading system, the IMFs firm stand over its conditions and the overall government incapacity to deal with the issues at hand.
The first and the last are perhaps the most pernicious, which convinced Hafeez Pasha, Dean of social sciences at BNU, to warn that "Pakistan is on a brink of economic collapse", in an interview to The Financial Times last week.
This begs the question if the P/E multiples really hold significance in uncertain times; academics don think so.
"A stock is worth its future earnings, but that involves uncertainty," Jeremy Siegel, professor of finance at the University of Pennsylvanias Wharton School told The Wall Street Journal late last month. "The more uncertainty there is, the lower the P/E will be", the professor asserted, while suggesting that in interesting times comparisons with historical valuations aren meaningful.
Apparently, on a net-basis, local investors seem to realize this, given their persistent offloading of positions to the foreign investors in recent months. But why don the foreign investors, especially the herd-leader Mark Mobius, understand this, is a big question - the answer to which, ironically, is also uncertain.
One notion is that the foreigners know something, which others clearly don ; something big from a geo-political perspective. But that seems unlikely, given their historical mistiming of the market. A more plausible opinion is that since the foreigners now hold most of OGDCs free float, they have to sound bullish otherwise the stock might crash, leaving them with huge losses. In both cases, perhaps, its better to be safe than sorry.