The Karachi Stock Exchange (KSE) 100-index has lost almost 9.5 percent from its all-time high level of 5621, and investors have lost substantially during the period under thin volume because of levy of CVT and early implementation of margin financing.
The recent erosion in share prices is the fourth such correction. This time, the market, up till now, as depicted by the KSE Index, is down 320 points (5.8 percent) in the past 3 weeks.
After January 2002, when the stock market rally started, share prices are currently passing through the fourth downward correction (or a small bearish spell) in local bourses.
The first one was in January 2003 when the Index fell by 600 points (20 percent) in 6 weeks and then recovered.
Later on, in September 2003, the Index underwent a major 7-week correction of 800 points (18 percent). Then, due to surprising tax on share trading, KSE Index went down 550 points (10 percent) in May/June 2004, and recovered marginally.
But an interesting observation this time is that volumes are and huge losses have been booked by investors. It is felt that many players have incurred substantial losses although the KSE Index has only gone down by 8.9 percent since April 19, 2004 peak (on closing basis) of 5621 points, said Mohammad Sohail, head of research at Investcapital Securities.
Yet, in calendar year 2004 to-date, KSE Index is still up 14.5 percent. Thus, there is need to solve this mystery why losses are huge despite the fact that KSE Index is not down substantially.
Being a total return index (including cash dividend) that is not fairly representative of market volume, KSE-100 Index does not show full picture of the market.
Critically analysing the recent price movement, the weakness in the KSE-100 Index is very clear as to how it restricts the downfall and exaggerates the rise. For instance, the KSE-100 Index is up 14.5 percent to-date in 2004 while a more representative capitalisation-based (consisting of high volume companies) LSE-25 is only up 4.0 percent.
Similarly, from its peak on April 19, 2004, KSE-100 Index is down by 9.5 percent only while LSE-25 has eroded sharply by 17.3 percent since its 2004 peak. Thus, it is obvious that share prices have fallen more than indicated by the famous, so called benchmark KSE-100 Index.
Sentiment and turnover drive all markets, and especially equity markets, in the short run. "While currently, the mood, sentiment, and volumes in local bourses are not good, CVT, Wana operation, T-Bill yields, President's uniform, Margin Financing, etc are all excuses, we think.
Such phases are common when any (including good) news is taken as negative. And, Pakistani stocks are currently passing through that phase."
Sohail said that on economic and corporate earnings front there is no major setback or negative news as yet. Based on 2004 projected earnings, market (on 42 sample companies) is currently trading at PE of 9.4 multiples with dividend yield of 6.5 percent.
This is down from 10.7 multiples, as PE depends on share prices and not on KSE Index. With 2004 results of many companies announced, market should focus on 2005 earnings where it is at PE of 8.4 multiples, with dividend yield of 7.2 percent.
These multiples look attractive as historic average PE of Pakistani market is somewhere around 10 multiples with a wide range of 5-20 multiples. PE of 5 multiples was seen around 1998 when economic conditions were bleak after the nuclear tests, while a PE of 20 multiples was seen in the foreign investor-led bull-run in 1994.
"And we believe that in the light of expected profit growth, PE of 10x looks sustainable."
The imposition of CVT and WT had increased the cost of transaction at the bourses. The day traders, in particular, used to book gains on mere movement of some paisa and the levies have made their job difficult.
Likewise, the arbitrage between the bourses has also evaporated. "The rationale behind the imposition of CVT and WT is apparently to add a new stream of tax revenues from this highly under-taxed sector; however, it acts as an instrument to discourage speculative activities at the bourses", said Anwar Ahmed Khan, research analyst from Capital One Equities.
Moreover, it would also help in documenting the economy and discourage the induction of easy money.
Khan said that as per the tradition of stock market, such changes always receive negative response and result in squeezed volumes. However, in the long run, these measures are likely to provide stability and enhance the overall integrity of the stock exchanges.
Proactive measures that are now being taken would also boost the confidence of both domestic and foreign investors providing ample depth to the market in future.
The CVT and Margin Trading issues are more peculiar to the internal operations of the bourses and have nothing to do with the earning prospects of the listed companies. Any positive development on the ground for rationalising CVT and WT would help the market to recover its losses.
"Even then, we are of the opinion that the bearish trend in the market would continue for long, particularly during the transitional phase from badla financing to margin financing.
Moreover, one should keep an eye on the macro economic indicators to grab the pulse of the situation while focusing on the growth and yielding stocks which usually end up giving healthy returns.
In this particularly bearish market, the strategy should be to 'accumulate' key stocks belonging to sectors such as power generation, oil & gas exploration and marketing companies, refineries, and fertiliser.
"Despite the looming negatives about the market and economy, we believe it is the time to take long-term position in blue chips with good earning prospects. The companies such as PTCL, Hubco, OGDC, PSO, NRL and FFC may gain most out of this bearish market"
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