Capital market: hope and fear

When investors in the Pakistan stock market — which stood out as ‘the best performing market in Asia in 2016’ — waltzed into 2017, they had little knowledge of what lay ahead.

Jubilant stock pundits were predicting an upsurge of another 6,000 points in the benchmark KSE-100 index in 2017. But that was not to be.

Ironically, the Pakistan Stock Exchange (PSX) which had provided investors with mouth-watering 46pc returns in 2016, has turned out to be one of the ‘worst performers in 2017’, dishing out a negative return of 0.4pc against healthy positive returns by its regional peers. But for all that, the fault does not lie with the market, but a dramatic turn of events on the political front.

Following the first few minutes after the announcement of the Supreme Court decision, the KSE-100 index surged. But is the ‘uncertainty’ really over?

Following the Panama leaks, certain opposition parties filed a case primarily aimed at seeking the Prime Minister’s disqualification on charges of offshore assets, tax evasion and money laundering. When the Supreme Court reserved its decision on Feb 23, stock investors were put on tenterhooks.

The possible outcome of the case was shrouded in ‘uncertainty’. A veteran broker at the market says: “As everyone knows, for the market, uncertainty is worst than bad news”. In the past 12 weeks, uncertainty over the outcome of the Panama case took its toll on the market. The KSE-100 index, which had touched intra-day peak at 50,887 points on Jan 27, sank to intra-day lowest at 46,048 points on April 19, effectively posting a loss of 4,839 points or 9.5pc.

Investors were highly anxious in the last two days before the announcement of the Court verdict. As they pitched between hope and apprehension, a day before the verdict on Wednesday last, the index notched the biggest-ever intraday volatility of 1,668 points. While, following the first few minutes after the announcement of the Court decision last Thursday, the KSE-100 index surged, cracking through the ceiling and marking another milestone of the highest-ever intra-day gains of 1,906 points.

Investors were relieved that their worst fears of an abrupt political upheaval did not materialise as the Supreme Court removed the prospect of the immediate disqualification of PM Nawaz Sharif, and instead ordered further investigation into corruption charges.

But the question that sat heavily on investors’ minds has not withered away: Is the ‘uncertainty’ really over? Optimists hope that investors will now move on to take fresh positions. But detractors reflecting on the post-judgment reaction by opposing political parties caution that the battle may have ended but the war was far from over.

Muhammad Fawad Khan, executive director Research at BMA Capital Management said that from the market’s perspective, the Court decision was positive, but added that a split verdict of 3 to 2 by the five member bench and deadline of 60 days for completion of Joint Investigation Team (JIT) has the potential of carrying forward the overhang that the market underwent ahead of the decision announcement.

AKD Securities said in a report that the plaintiffs would have to produce a new set of supporting evidence as the ruling deems the current evidence to be inconclusive. “This can be challenging for both the plaintiffs and the JIT, to complete an investigation in the stipulated 60 days”.

But for political disruptions, most market participants concur that the PSX is still attractive as the benchmark KSE-100 index is currently trading at a price-to-earnings (PER) multiple of 9.9 times the 2017 earnings against the Asia Pacific regional average of 12.6 times, while offering twice as better dividend yield of 5.0pc versus 2.7pc offered by the region.

Arif Habib, the former chairman of the PSX told this writer that the investors’ focus could now shift to upcoming corporate results, the federal budget to be announced in the last week of May and the upgrade of the PSX to MSCI Emerging Market, from the current MSCI Frontier Market, due in May. He asserted that the fundamentals of the Pakistani market were strong and put forth several proposals for its further growth.

Khurram Schehzad, Chief Commercial Officer at JS Global Limited says that Pakistan equities are a more bottom-up story (corporate-driven performance) than a top-down one (macro-driven performance), which is why they have remained resilient and performed undeterred in the last many years.

“Corporate earnings growth averaged well over 20pc in the last 6-7 years while return on equity has been upwards of 25pc”, he says. During the last 3-4 months foreign portfolio outflows stood at massive $160m against the full year foreign selling of $339m last year.

“Despite the fact that the Panama case hangs in the balance for another 60 days and the market may experience increased volatility in the short-term, investors who believe in fundamentals should stay invested” says Khurram.

Many fund managers who hold Rs613bn of the Pakistan Mutual Fund Industry share the same view.

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