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Capital market peaks

December 02, 2012

The Karachi Stock Exchange.—Reuters Photo

KARACHI: Good times are rolling for the investors, brokers and dealers in Pakistani equity market. The stock prices are soaring and at the joggers park in the morning one sees more billionaires than ever before; much of their wealth derived from the stock market that beats its record each passing day.

Just last week, the KSE-100 share index gained as many as 336 points. And the KSE has already delivered a return of 46 per cent to investors since January this year, outperforming all regional and even global markets.

The stock market seems to have distanced itself from other grim macro headwinds.

"The market has its own mind and it acts on the basic concept of risk and return", says a senior stock broker. When the market hit the pit after the crash of 2008, all listed stocks had dropped to a highly attractive level with low single digit valuation. But it is only in 2011 that investors both local and foreign have entered the Pakistani market in droves. Low valuation is one of the reasons. But perhaps the most important factor is the price take-off in penny stocks, called second and third tier stocks. In the previous two months, the laggard textile sector has returned to life after countless gloomy years.

Most textile companies have jumped out of the red, their latest financial figures depicting exciting profits. Analysts list many reasons for the rejuvenation of the textile sector. The growth of foreign demand and the weakening of rupee are said to be biggest factors. But of equally important to most corporates, mainly in the textile sector is the heavy plunge in their financial expenses. That has direct relationship with the cost of borrowing and so the SBP's Monetary Policy. As the policy eases with interest rates cut dramatically in the past few MPS, corporates have managed to retain money that it paid in interest on debts and even retire huge loans. The benefit has traveled down to the bottom-line of many highly-leveraged corporates in all sectors.

Arif Habib, a senior broker and industrialist admits that interest rates have bearing on the company profitability. He says in the low interest rate scenario there is ease of valuation, which in turn raises equity values. "The demand for risk-free return investment avenues decreases and investors turn to stock exchanges in search of higher returns". For corporates, the borrowing appetite increases with lower interest rates. Mr.Arif said that with low interest rates, consumer is comfortable with cash, which raises demands for goods and help Fast moving consumer goods companies and others post a healthier top and bottom line.

Analysts at brokerage AKD Securities wrote in their week-end report: "Investors will keep a close watch on inflation numbers next week where a reading in the below 8 per cent YoY range should further strengthen expectations of monetary easing in the upcoming MPS". And analyst at JS Global said that the sentiment at the local bourse remained positive this week, shored by anticipation of further easing in the upcoming monetary policy.

Another stock strategist said: "We have already witnessed that, when the interest rates are softer, people with surplus money are not inclined to invest in not-so-profitable instruments and start venturing into risky opportunities. This is what we have recently seen; a steep rise in prices in the stock market with improved volumes; in commodities and real Estate.