The Blood Bath

PSX though a small market has come a long way, gone are the days when market was highly influenced by few major players and now is recently performing mostly on actual fundamentals. Many economists make the mistake of including politics and political instability as the major cause for everything related to PSX, be it PSX gaining or loosing.

This narrative though may be highly appealing is far from reality since there are many underlying forces which are affecting the market and the reactions of major portfolio groups. Since the start of October one type of investor that has been net seller is Foreign Corporates by over -41.97m$.

Before people jump in to blame the incumbent govt lets see the merits of these net selling and why would a Foreign Corporate become a net seller in PSX in a month when major q1 results have shown good earning per share.

Things get more interesting if we review numbers sector wise. Foreign Corporates were net sellers by 15.76m$ in Cement, by 8.77m $ in O&G exploration companies, 2.38 m$ in O&G Marketing companies and 2.35m$ in Fertilizer sector.

Selling in Cement and O&G exploration companies clearly are evidence of profit taking when market peaked in the last weak of October. Relatively Fertilizer has lesser net selling which can be due to confirmed dividends of EFERT, DAWH, FFC and Engro in the end of November and start of December.

Cement on the other hand, though showed massive growth in q1 2021 (as per financial statements shared) but apart from Bestway Cement, no other public listed Cement company announced any dividend for this quarter. Today Bestway Cement was the only Cement share that showed price increase (0.07% increase) as shown in Figure 1.

Not having any dividend to look forward to in the next two three months makes the gains in earning per share insignificant and thus investors would try to reap immediate benefits of the surge and sell off the share at the earliest and try to purchase later at a lower price. This would help him get some much-needed cash and buy the share at a very attractive Price to Earnings ratio.

As for Fertilizers their rise and growth both have been not so aggressive. With a strong dividend backing, the share price didn’t reduce below 2.93% apart from Fatima which didn’t announce a dividend and AHCL which got ex-dividend today. The strongest Fertilizer share- EFERT in terms of dividend as compared to price only showed a drop of 0.68%. It is important to remember that Fertilizer is one of the sectors which will have to pay considerable amount to govt in leu of GIDCL and is still discussing with govt to change payment terms in order to reduce the cash flow impact.

Why are the Foreign Corporates selling and selling throughout the month of Oct?

This is a very valid question but instead of blaming govt or some other political instability with India etc., let’s see real factor. A Foreign Corporate need to take out his earnings not in PKR but in US$. The Foreign Corporate won’t be judged based on earnings in PKR but instead on their earning in dollar term or other major respective currencies. Foreign Corporates are highly susceptible to variation in dollar and that is what exactly happened in Oct 2020 as shown in figure 2. Dollar dropped by approximately 4 -5 % from 168 to 160. This means that Foreign Corporates got a 4 % increase only in currency variation within 1 month and thus selling shares made further sense for them.

It’s not that the rupee is appreciating a lot, its Dollar that has depreciated in the last month compared to IMF basket. If this clear-cut motivation due to dollar depreciation was not enough for the foreign investor to sell, they also had a global motivation due to Covid resurge and US elections on November 3. Post-election dollar strength will be critical for foreign investors coming back. In my humble opinion we will see the resurge of dollar along with Foreign Corporates net buying by November end or December once the uncertainty in US is cleared out.

Another question arises, so Foreign Corporates were net seller, but they were throughout the month, so why the blood bath on Oct 29,2020?

To answer this question lets see the index and its relation to the volume. On Oct 27,2020 KSE 100 reached 41,922.19 point and couldn’t sustain the same and started dropping the same day to 41381.83 point. This drop itself was around 540 points and it was apparent there and then that market forces don’t look too interested in purchasing at these appreciated rates. The only sector constantly net selling every day was Foreign Corporates.

From Oct 19 – Oct 27 Mutual Funds were net buyers by 16.62m$. In the same period along with Foreign Corporate , Banks were also net sellers by 10.90m$ as shown in figure 4 .During the same time Mutual Funds major focus remained in Cement leading to net buying by 9.01m$, followed by net buying by 3.21 m$ in Fertilizers.

From Oct 28 -29, Mutual Funds saw the opportunity to net sell and take out valuable return from the upside. In the meantime, insurance companies decided to purchase the shares at the lower side for long-term investments. Foreign Corporates also saw this opportunity to sell more and take the short-term return as shown in figure 5. One thing which was positive today was the volume in KSE 100 which can be attributed to net buying by insurance sector and individuals which used this opportunity to buy shares at reasonable price for the longer run.

Individuals focused on restructure during the last 2 days and were net sellers in Cement by over 6.74m$ and net buyers in Oil & Gas exploration sector (which currently is highly undervalued) by 2.79m$. There are many reasons for today’s drop, Mutual Fund and Individual sector-wise selling and continuous selling of Foreign Corporate. Insurance companies on the other hand decided to purchase Cement shares since they have a longer holding power and can wait for the subsequent quarter results. If market rise is attributed to skewed investment by one investor profile it will not last long as that sector will not be able to sustain market forces. Mutual Funds net buying by over 16m$ was a critical component of the rise of PSX in the last week and culminating on Oct 26 ,2020. When Mutual Funds didn’t have the remaining cash to sustain purchases or found the rates to high to sell the market couldn’t sustain the pressure from Foreign Corporates and Mutual Funds decided to take some profit prior to the month end.

This cyclic nature is part of the market and thus needs to be accounted for. A smart investor will be an investor not a trader. He will review the reports and potential of the company and make investments accordingly. People who focused on dividend or overall blue-chip company will not be fazed by the cyclic nature of the stock exchange. However, if you are trading on margin and hoping for short term gains based on the candle analysis or tips from major brokers, you are bound to be fazed when a major sector runs out of steam and no one else joins in the fun.

So, what should we look forward to the next week?

This is an interesting question. It seems like Foreign Corporates exit will continue based on current US scenario and dollar depreciation. However, other remaining investor profile have no major reason not to invest or become net buyers in the short term. The only thing that is looming is the monetary policy, any increase in interest rate will automatically make interest bearing instruments more viable and thus will create a massive selling spree in PSX. As for the current situation cyclic natures can be seen in Cement, steel etc., while Fertilizers should remain constant.

As Warren buffet says

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”