Depleting stock market depth may cause volatility: analysts

Though the corporate earnings in Pakistan will post above average growth, the depleting market depth may cause market volatility in case foreigners tried to dump shares to reduce their exposure to frontier and emerging markets, analysts said.
"At a time when Pakistan bourse is passing through an extremely low volume phase ($31 million average in July), the global stocks have tumbled amid concerns that US economy is weakening", Farhan Mahmood, senior analyst at Topline Securities said. Most of the investors in Pakistan who have not made money this year (KSE Index flat in 2011) are confused and concerned as to what would happen if local bourses saw similar selling by foreigners, he added.
The same trend was observed on Friday when local index fell 4 percent, with low volumes, he said. MSCI All country world index has fallen 13 percent from its May peak of 909.18 points while US markets crashed more than 4 percent (Dow Jones) on Thursday on widespread worries including the weak job market. The selling in world markets gained momentum as Japanese and European policymakers stepped in with dramatic measures to shore up their financial markets.
In Pakistan so far offshore investors have sold on net basis shares worth $30 million in last 13 sessions. And now the concern is with falling global markets would there be more selling. Amid this fear the local bourse may remain under pressure in the short run and would move in line with regional markets.
All is not lost, as corporate earnings are expected to post 27 percent earnings growth in 2011, far better than historical trend. This is evident from recent first half of current year results where fertilizers and few banks posted more than 60 percent and 25 percent earnings growth, respectively, which would likely continue in next six months, thanks to higher margins, led by rising urea prices and better return on assets. Similarly, the heavyweight oil sector is expected to post earnings growth of 26 percent mainly, led by higher oil prices.
"With rising corporate profits and falling interest rate, we advise investors to buy selected stocks on dips this panic sell-off provides opportunity to build portfolio", he said. Pakistan's market is trading at a deeper discount of 55 percent to the Asian markets, more than average discount of 30-40 percent. Thus, with double-digit profit growth of 27 percent, Pakistan market is attractive at a PE of 6.5x at a time when other Asian markets trade between PE of 8-17x. "However, we believe that global economic outlook and local political scenario remain a key concern for local market", he added.