Pakistan Stock Exchange down but not out

DAWN.com

Late last month, some believers slaughtered a couple of goats at the altar of the Pakistan Stock Exchange to drive away evil spirits that have come to haunt what, only a year ago, stood out as the best performing market in Asia, giving out a mouth-watering return of 44pc.

The celebrations continued well into 2017. But as all good things come to an end, so did the investors’ honeymoon with the market.

On May 25, the KSE-100 index hit the intra-day all-time high at 53,127 points. To the surprise of brokers and analysts who were espousing the index would close at above 60,000 points by the winter of 2017, it was a chilling moment when the market started to melt.

Almost four months on, the PSX has not found a foothold. By the middle of last week, the benchmark KSE-100 index stood at 42,310 points, representing a decline of 10,817 points or 20pc. From the closing on Dec 31, 2016 at 47,807 points, the Index has lost 5,497 points, representing the year-to-date negative return of 12pc.As the paper value of corporate Pakistan, signifying market capitalisation of all 561 listed companies combined, lost Rs1.04 trillion — sliding from peak of Rs10.44tr to Rs8.88tr — small investors, particularly, have been ruined.

Almost four months on, the PSX has not found a foothold. But for all that, in the PSX boardroom members continue to exude confidence

Things started to fall apart after an unkind federal budget for the stock market, which piled more taxes and provided few incentives. The deteriorating balance of payments situation and the souring of expectations of immense foreign flows following Pakistan’s MSCI Index reclassification to Emerging Market from Frontier Market were major setbacks.

But the crowning blow was the apparent loss of credibility of the ruling house of Sharif, which gave rise to prolonged ‘uncertainty’. There is a saying that, for the stock market, uncertainty is worse than bad news. Such uncertainty still plagues the market, forcing investors, both institutional and individuals, to stay on the sidelines.

But for all that, in the PSX boardroom members continue to exude confidence.

The Chinese strategic investors — China Financial Futures Exchange Co.Ltd, Shanghai Stock Exchange and Shenzhen Stock Exchange — had bought 30pc or 320 million strategic shares of the PSX for Rs8.96bn, at a per share price of Rs28.

In the ongoing bear run, the stock price has receded to Rs20.24, denting Chinese investment by Rs2.48bn or 28pc. Does that worry the Chinese buyers? “Apparently not”, says Haroon Askari, managing director, PSX. He contends that the Chinese have made a long term strategic investment.

“They are here for the long haul and are keen to launch the derivative market with the ‘Exchange Traded Fund’ as the first product”, says Mr.Haroon. It may be followed by other initiatives streamlined in the SECP’s capital market development programme.

Cross border listing and effort to attract Chinese investors to the local bourse are being pursued.

But many analysts are not very optimistic on immediate market prospects: Says Zubair Ghulam Hussain, CEO at Insight Securities: “Keeping the economic and political picture in mind, we feel that the market may not see broad-based upward movement in the next few months.”

Yet, he said, selective opportunities in specific stocks/sectors could open up, stemming from (possible) currency depreciation; governments focus on control of imports and boosting exports and a likely positive policy rate adjustment.

According to Insight Securities, the KSE-100 index is currently trading at 2018 price-to-earnings multiple of 9 times, compared to average MSCI Emerging Market index forward price-to-earnings of 12 times, indicating a discount of 28.6 times.

Analysts at brokerage Next Capital lamented that while it took about nine months (Aug 31, 2016 to May 25) for the KSE-100 index to add approximately 13,000 points (33pc return), but in barely three months (May 25 to early this month), most of those gains (about 22pc) were washed away.

“This may resonate with the fact that excesses in one direction often leads to an excess in the opposite direction”, they admitted.

But market observers pin much of the blame for the free-fall of the stocks on mutual funds.

In May, the last month of the rally, funds had bought shares worth $47m. All of that helped to absorb foreign portfolio outflows. With a scintillating growth over the last decade, the assets under management (AUM) of the mutual funds industry have surged to Rs625 billion.

Equity funds outperformed, both in size and growth. At the end of May, the size of equity funds stood at Rs309bn, making a half of the entire mutual fund industry’s AUM.

But all that has changed. In the current bear run, funds have been the major sellers and perhaps the spoilers of the market. According to a big broker, mutual funds are currently sitting on a cash pile of Rs70bn, waiting for the stocks to bleed further before entering to buy at cheaper valuations.

“There is nothing wrong or illegal in this strategy”, argued a manager of one of the three largest equity funds in the market. “We are not here to support the market but to protect the interests and returns of our certificate holders”, he asserted.

Published in Dawn, The Business and Finance Weekly, September 18th, 2017

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