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Has the stock market bottomed out?

Updated January 14, 2019

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The Pakistan stock market has had more than its fair share of trouble. ─ File photo
The Pakistan stock market has had more than its fair share of trouble. ─ File photo

The question that sits uneasily on the mind of every stock investor, analyst, broker and his agent is: has the market finally found the bottom?

The Pakistan stock market has had more than its fair share of trouble. When the market dished out a mouth-watering 46 per cent return in 2016, investors entered in droves in search of the investment avenue that offered the best returns among various classes of assets.

But then the misfortune struck on May 25, 2017. On that fateful day, the KSE-100 index hit its intra-day all-time high of 53,124 points with the market capitalisation crossing well over Rs10.5 trillion.

The reason the market has experienced a meltdown of 26.7pc since then with the index trading at 38,922 points at the moment — 14,202 points down from its peak — is that almost all market gurus and stock strategists misjudged the implication of Pakistan’s uplift to the MSCI Emerging Market, from the MSCI Frontier Market, effective from June 1, 2017.

Many market gurus are expecting the market to calm down as political noises have subsided to a whimper while most see the economy on the road to recovery

Betting on a heavy influx of foreign investment from passive funds, local investors put all their money on the table. Foreign investors decided to do just the opposite and withdrew with a huge selling. In the last three years (2015-18), net outflows from the local equity market have been a massive $1.6 billion.

Individually, stocks have been badly battered. A glance at the trading prices on May 25, 2017, and today provides an insight into the investors’ losses: the share of HBL was trading at Rs305 on May 25, 2017, which has now tanked to Rs131; UBL has sunk from Rs259 to Rs137; OGDC from Rs186 to Rs140; Indus Motor from Rs1,990 to Rs1,198; and cash-rich Engro Corporation from Rs399 to Rs324.

Cements have perhaps received the most brutal beating. Lucky was trading at Rs962 then and is now hovering at Rs462. DG Khan has crashed to Rs86 from Rs245.

Many analysts believe that the market may have now bottomed out. The head of investments at Lakson Investments, Mustafa Pasha, reckons that the investor focus could shift to attractive valuations and double-digit earnings growth for index heavyweights, which went unnoticed shrouded by political and economic uncertainty.

“Stocks are now available at throwaway prices,” says a senior broker. He pointed out that the KSE-100 index was trading at the forward price-to-earnings ratio of 7.51, which represented a discount of 41.8pc over the average of regional peers.

Besides the heavy unplugged foreign selling, negative happenings intermittently on the political and economic fronts have resulted in stocks delivering losses in the last two years.

With a negative return of 20pc, the Pakistan market was the worst performer among global equity markets in 2017. It improved to the fifth worst-performing market in 2018, providing a negative return of 24.9pc. In the last quarter (Sept-Dec), the KSE-100 index lost 17pc in dollar terms, reflecting the worst quarterly performance since the global market crisis of 2008.

But many gurus are expecting the market to calm down as political noises have subsided to a whimper while most see the economy on the road to recovery.

Muhammad Rameez at Foundation Securities expects the market to rise “like a phoenix from the assets” to deliver investors a return of 21pc by December on the grounds that lower-than-expected inflation will prompt the State Bank of Pakistan to soften its stance on monetary tightening.

A broker said the index was trading at a forward P/E of 7.51, representing a discount of 41.8pc over the average of regional peers

The government has its focus on the two major problems that plague the economy: dwindling foreign exchange reserves and the widening current account deficit. Islamabad has been able to secure a financial support package from friendly countries while it is in talks with the IMF for a bailout package on acceptable terms.

“I believe the worst is behind us and there are some silver linings that provide much-needed hope and confidence with the recent efforts made on the macro front” says Khurram Schehzad, chief commercial officer at JS Global.

He adds that the efforts in the short run have created room for managing external and fiscal challenges at hand while the policymakers craft the long-term sustainable policy for growth and eventual prosperity.

Topline Securities in its outlook for 2019 stated that the year may not be ‘exciting’ given the tough economic environment of low growth and high interest rates. “We expect the KSE-100 index to trade in the range of 40,000-45,000 in 2019, providing a gain of 8-22pc, less than the required rate of return.”

Other pragmatists weigh several disconcerting factors that could topple the market outlook. BMA Capital in a recent note made 10 “wild predictions” for 2019. They included: Pakistan failing to satisfy the FATF and placed on the Black List, a wide-scale military confrontation along the eastern/western borders, a short-lived stay in the IMF programme, the coalition government at the centre breaking down amidst calls for snap elections, the opposition mending differences and getting united on a single-point agenda of toppling the government, Pakistan entering the Yemen war, crude prices touching the $25 per barrel mark, acute water shortage, another greater (global) crisis, and Pakistan finally finding significant commercial hydrocarbons.

Published in Dawn, The Business and Finance Weekly, January 14th, 2019