THE belief that the stock market is the ‘barometer of a country’s economy’ is a misnomer.
While there are 559 companies listed in the Pakistan Stock Exchange’s (PSX), its performance is actually only measured through its 100-shares index. Their performance sets the trend of the market irrespective of what goes on with the other 459 companies.
Interestingly, even in the 100-shares that form the Index, there are “heavyweight” sectors such as banking, oil and gas and cement. Banking alone commands as much as a quarter of the Index weight. The 100-index is therefore realistically a reflection of what passes in the heavyweight sectors and not the state of the country’s economy.
An uptick in the State Bank of Pakistan’s (SBP) policy rate has the potential to provide space for banks to raise interest rates and in-turn cause a surge in bank stock prices; the rise in international oil prices will lift the share prices of oil and gas companies, and a hike in the selling price of cement by manufacturers almost always rallies cement stocks.
Factors that are believed to brighten up the bottom lines of the heavyweight companies will cause a surge in the price of stocks which will be reflected in soaring Index numbers. In bad times, more for these three sectors, the reverse is the case.
Unlike most developed markets where ‘fundamentals’ drive stock prices, “sentiments” take precedence in the Pakistani market
Apart from this anomaly, unlike in most developed markets where ‘fundamentals’ such as the earnings per share (eps) and price-to-earnings ratio (p/e) drive stock prices and so their stock indices; “sentiments” take precedence over fundamentals in the Pakistani market.
Consider the PSX trend in May. During the month the equity market bled profusely, the KSE-100 index sinking by 2,642 points, giving out a negative return of 5.89 per cent. Analysts recorded it as the worst performing May since 2010.
Although gloomy economic numbers such as the balance of payment position came to haunt investors, the principal reason that dragged the market down was the heated atmosphere on the political front. Investors wondered if there would be a smooth transition of power to the caretaker government that could lead to timely elections.
Regardless of individual company fundamentals, which in many cases, presented prospects of high yield and growth, stock investors preferred to ditch equity and run for cover in risk-free investments.
But as clouds of political ‘uncertainty’ have started to dispel with the appointment of a caretaker set up, thereby paving the way for a smooth sail towards the election on July 25, investors have begun to return to the equity market.
Both individual and institutional investors are falling over one another in a bid to be the first to take positions in attractive value stocks. Pakistan’s equities have so far provided a positive return of 2.4pc in the first five sessions following the takeover by the caretaker government.
Most analysts affirm that historically the average return during the past interim governments has remained between 14 to 17pc.
Yet, the fly in the ointment is the selling of equity by foreign investors. Foreigners continued to sell stocks for the fifth consecutive week up until June 7, the outflow amounting to $29.6 million, which took the net outflow of foreign investors’ portfolio investment (FIPI) to $75.8m since May 18.
Unlike the past when even a whiff of sell by foreign investors’ spooked locals, prompting them to jettison their holdings, individual and institutional investors kept up their sangfroid and absorbed all of the foreign selling.
Stock brokers were once the king of all they surveyed. Although that power has become diluted, the buying and selling by foreign investor’ who are known to hold around $6 billion worth equity in the Pakistani market, can influence sentiments of local investors.
Yet, most investment strategists affirm that the ongoing sell-off by foreign investors is not Pakistan specific. According to figures released by the Institute of International Finance (IIF), headquartered in Washington, DC, foreigners dumped $123bn in emerging market assets in May, 2018.
Another chart provided by an independent analyst settled in London shows the mind-boggling outflow of $35bn in 2018 from Japanese markets alone, followed by $5.4bn from the Taiwan market, $4.2bn sell-off in Thailand; $3bn from Indonesia and $2.1bn from South Korea. The only exception is China which showed a huge inflow of $11.7bn in its capital markets up to March 31.
“Money goes where money grows”, said economist Dr Shahzad Elahi, who teaches financial management in a local business school. He said that due to rising US Treasury interest rates, foreign fund managers are diverting investment back home in risk-free assets from most high-risk, low return emerging markets. “Globally we are witnessing gradual monetary tightening since the banking crisis nearly a decade ago”, he said.
In regard to Pakistan, several analysts concurred that after taking a “top down” approach, foreign fund managers were not inclined to take long term positions in Pakistan equity. They were viewing with some concern the country risk, a bleak economic picture and the volatile political situation.
Brokerage Topline Securities in a recent report stated that the SBP was likely to raise Policy Rate by 175bps to 8.25pc from current 6.5pc by June 2019 which would be positive for the banking sector since every 1ppt increase in interest rates leads to a 6pc rise in banks’ earnings.
Foreign investors are greatly invested in major commercial banks such as MCB, United Bank and Habib Bank, which together carries huge weight in the KSE-100 Index. The foreign sell-off in those banks was the major reason for the index decline.
At the writing of this report on Monday, June 11, the rupee was sinking against the US Dollar — the third time this year that the rupee was being devalued, following the earlier two devaluations of 4.83pc on Dec 8, 2017 and 4.01pc on March 20, 2018.
A senior banker who asked not to be named said that the current caretaker Finance Minister Dr Shamshad Akhtar was “hawkish” in her approach and would scarcely dilly-dally if concerns on the economy warranted monetary tightening and rupee devaluation. Several analysts cherished hopes that such bold steps could still bring back the Pakistan equity market on the radar of foreign fund managers.
Published in Dawn, The Business and Finance Weekly, June 19th, 2018