EDITORIAL: Pakistan Stock Market (PSX) is on a consistent rise. There are elements of re-rating of country risk by international credit rating agencies due to the avoidance of debt default, a decline in interest rates, and anticipation of further drops following a sharp fall in inflation.
However, these factors alone may not fully explain the continuous bull-run that PSX index has experienced over the past year. While it’s undeniable that macroeconomic indicators have significantly improved, there isn’t much to show in terms of company performance.
The economic slowdown persists, and volumetric sales in key industries remain far from their respective peaks. Slack in capacity utilisation is difficult to absorb.
Foreign investors are not significantly contributing as well, as the net buying for the fiscal year to date is negligible. This is due to Pakistan’s downgrade from an emerging to a frontier market for certain foreign funds, which are forced to sell. Local investors have been purchasing those shares.
Thus, the market’s growth is largely driven by continuous buying from local investors, despite the political instability where the government remains on shaky ground and long-term investments are scarce.
The question remains: why is the stock market attracting investment like bees to honey? There are some fundamental reasons behind this. One: Despite the KSE-100 more than doubling during this bull-run, research shows the weighted average P/E for 2024 is 5.2x, which is almost a trailing P/E, as three quarters of the year are over. This remains at a discount compared to the 10-year average trailing P/E of 7x, suggesting some discount is still available.
Another perspective is the KSE-30 index, which is based on stock prices (unlike the KSE-100, a total return index), is still below its peak from May 2017. Therefore, the market has some catching up to do, as it underperformed between 2017 and 2023.
The lingering question is why this catch-up of 6-7 years is happening in just 18 months, especially when future growth for listed companies isn’t particularly enticing, and the economy lacks a strong growth momentum. The answer may lie in the lack of alternative investment options for local investors. Historically, real estate has been the go-to choice for savers — small, medium, and large alike.
While long-term returns in real estate have roughly matched the stock market, its depth and informality have made it the obvious choice.
However, due to recent tax regulations and a crackdown on informal transactions, the real estate market is slowing down, and some capital is flowing into the stock market. The fall in interest rates is also shifting lower-risk investors from fixed-income instruments to stocks. But this is a regular occurrence and doesn’t fully explain the ongoing bull-run.
An interesting development is that banks are trimming non-current account deposits to avoid higher taxes if their Advance to Deposit Ratio (ADR) falls below 50 percent. Last month, the gap was estimated at Rs 2.5 to 3 trillion rupees.
Many banks are lending at sub-KIBOR rates, and some are enjoying single digit borrowing costs. At the same time, they are avoiding deposits, particularly when they must pay 16 percent on savings accounts. This money may be partially flowing into the stock market.
Additionally, the revival of the sovereign fund, which could improve the balance sheets of government-owned companies like OGDC, PPL and others, is also attracting investment in these companies, which have underperformed.
For these reasons, the PSX continues to perform well. However, investors should exercise caution. The faster the market rises, the greater the potential for a sharp downward correction.
Copyright Business Recorder, 2024
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