KARACHI: The Pakistan equity market is insulated to a large extent from the free fall in stocks in the world markets.
All participants may not agree with that assertion as the KSE has taken a big dip in the last week and first few sessions of the current trading week. But optimists, such as Faisal Shaji at Standard Capital Securities, are strong proponent of the immunity from other markets, based on low price-to-earnings (p/e) multiple of local stocks; a mouth-watering high yield and no exposure to the western markets.
The free-float based KSE-30 index yields p/e of 7.7 times, whereas the widely followed KSE-100 index trades at p/e of 8.6 times.
“This is the reason that the local market has not seen the kind of freefall, which the Indian bourses have experienced on the issue of European debt crisis,” says the analyst.
Pakistan has virtually no exposure in western markets whereas Indian businesses and financial sectors are strongly linked with outside world, which was why the Reserve Bank of India (RBI) had shown its inability to grapple with its own freefalling rupee against US$ (the Indian currency depreciated by more than 15pc; Indian Rupee reached 52 against US$). Despite being 3rd largest Asian economy and growing at a much faster pace for nearly a decade, Indian economy is pretty vulnerable to international crisis as opposed to this country. “Pakistan is an effervescent economy which can ‘unexpectedly’ rise just in case there is some improvement in ‘certain’ variables,” says Shaji.
Many of the local stocks, particularly in the oil & gas exploration sector could show ‘double digit’ earnings growth of as high as 30 per cent in FY12, but are ‘underperformers’.
A particular big private bank showed 9-10 per cent earnings growth in CY11 alone and provided cumulative annual dividend of 10 per cent, yet its stock is under pressure due to hasty selling by foreign investors.
Brokerage Standard Capital said it believed Pakistan provided immense opportunity to forward looking ‘smart’ investors who may want to make 3-5 months gain based on some of the cheapest valuations of big ticket local stocks in Oil & gas production and exploration; fertiliser, banking, cement, selected refineries and others.
The analyst sets aside the political upheaval, domestic issues and low volumes, as issues that could only be fearful to nervous investors.
Pakistani stock prices were already low and very much ‘factored’ into low p/e trajectory as against regional markets where risks were supposed to be lower.
On the basis of expected earnings the current low prices were thought to provide opportunity to buy.
Some other oddities born out of investor nervousness were identified as the only DAP producer trading at just 4.5 times earnings and its parent fertiliser giant at a hugely discounted 7 times forward earnings.
In cement, the biggest cement company was venturing into the African markets, which currently was regarded as one of the highest growth and investment destinations, but was trading at a paltry p/e of 5 times earnings. Shaji’s report ends.
It is difficult to sift investors for and against the above arguments. Brokers and analysts would obviously sell optimism, for their livelihood depends on it, but even the ardent detractors have been silenced for a moment by the KSE-100 pull back by 95 points on Thursday, in spite of continuous and slow foreign sell. On Thursday, the foreign net sell was witnessed at $1.48 million.