Daily Times

KARACHI: The outgoing year was one of the most stressful periods for stock market investors in Pakistan, as the benchmark KSE-100 index plunged by 20 percent to close at 40,471, compared to average annual return of 35 percent during the previous five years.

An analyst at IGI Finex Securities Limited said the ruling party Pakistan Mulsim League Nawaz (PML-N) since forming government back in 2013, has exhibited some degree of political instability and uncertainty. However, since “Panama Paper” surfaced the media, put the then Prime Minister (PM) Nawaz Sharif in a tight spot with opposition demanding disqualification. This eventually led to PM’s ouster in mid 2017 through the judgment passed by the apex court of Pakistan, only to be replaced later in August-2017 by fellow party member Shahid Khaqan Abbasi.

“The performance of Pakistan equities in 2017 has been a tale of two halves really, the first of which saw market extending gains on MSCI-EM inclusion optimism that allowed benchmark KSE100 Index to peak at 52,876 points on May 24. During the second half, markets shifted their focus to political chaos, aggravating macros and stock-specific let-downs Resultantly, KSE100 Index troughed at 37,919 points on December 19”, said Elixir Securities’ analyst Ali Raza.

To add perspective, the KSE-100 index is down 24 percent from its intra-day peak of 53,127 recorded on May 25, 2017 and it is the worst year in terms of returns since 2008 when KSE-100 index was down 58 percent.

The value of the local bourse closed at $78 billion, down 15 percent from last year’s closing. Interestingly, the value is just 12 percent higher compared to 2007 closing as compared to an increase of 188 percent in KSE-100 index during this period.

The average daily volumes also suffered as a result with average daily turnover declined to 236 million shares/day, down 16 percent year-on-year (YoY) however, average traded value marginally improved to $115 million/day or 3 percent YoY.

Amongst the key sectors, cements, power generation and commercial banks were the major laggards while oil and gas exploration, textile composites and automobile assemblers were out-performers in the market.

The decline at the PSX started with expected MSCI-related inflows not materializing on MSCI rebalancing day, i.e. May 31, 2017 (net outflow of $82mn). All this while, political turmoil due to the disqualification of then Prime Minister, Nawaz Sharif, and post disqualification-related events along with concerns over economy – particularly on the external account – continued to eat into investors’ sentiments, said JS Research’s analyst, Syed Atif Zafar.

Foreign selling too was instrumental in market decline, as foreigners’ net selling clocked in at $ 496 million in 2017. Foreigners now have an estimated shareholding of $ 6.5 billion at the local bourse, which is 33 percent of the free float market capitalization and 9 percent of the total market capitalization.

IGI Securities’ analyst said this time around it’s different! For 2018, although political and macro headwinds do exist on the horizon, but these are somewhat momentary and in that respect attractive market valuation should be taken as an opportunity. “For 2018, we eye index target of 44,600 implying a return of 10% from its last closing of 40,371 level. We have taken earning growth as our basis for index estimation, which brings 2018F P/E to 8.6x and dividend yield of 5.9%. While we believe earnings growth, cheaper market multiples and long-term investment for case under CPEC US Dollar 62 billion project does make current market compelling, but we see near-term political clarity to be decisive for market sentiments to improve and thus potential of re-rating P/E multiples cannot be ruled out”.

Published in Daily Times, December 30th 2017.