The KSE 100 index has risen almost 40 per cent since Jan 1, making it the world’s best performing equity market for financial year 2012-13, in marked contrast with emerging market indexes that began crashing upon recent news of monetary tightening by the US Federal Reserve. However, having grown too much too quickly, it might be entering a phase of sideways trading with periodic corrections and low volumes.
Analysts have consistently questioned the strength of the move because of a stagnant real economy, persistent energy crisis and political deadlock in the face of a worsening security situation – conditions that usually discourage investment in capital markets.
Yet, market pundits say, it is in these very problems that lie the reasons for the market’s pendulum swing from fear to greed.
“Markets move on sentiment”, said Hammad Malik, fundamental analyst and head of sales at First National Equities, a Karachi based brokerage firm that handles more than Rs1 billion in investments.
“And it’s not so much what is wrong with the economy that drives investor sentiment, it’s perceived responses”.
Positive moves, corporate results: The new government’s positive announcements regarding the power sector circular debt, for example, led to feverish buying in the petroleum sector – both local and foreign. OGDC, PSO, PPL, Sui Northern and Sui Southern were among major gainers.
All of these companies have been strongly bullish since the election, and all pared gains marginally when the market fell a thousand points in mid-June.
Growth and deficit concerns, threatening economic contraction, were met by the timely IMF lifeline.
The Fund agreed to give Pakistan $5.3 billion on July 4. The market shot up 164 points the following day, signaling confidence in the strict economic discipline that comes with IMF austerity conditions. “But primarily, of course, equity markets reflect corporate results”, Hammad added. “All other things are important because they affect earnings. And recent events have been good for profits in certain sectors”.
A good example is the cement sector, where highly leveraged companies are benefiting from central bank monetary easing. With the discount rate now at nine per cent, cement majors are deleveraging.
And every time monetary expansion reduces their principal liability, shareholders see value addition in stock price and dividends.
The election also helped. The mainstream media focused on claims of rigging and irregularities, but Mr Market just needed a smooth transfer of power to bolster the upswing. Both local and foreign investors have flooded the market since then, which took off from 19,661 on election day (May 11) to 23,037 on Friday.
The new government’s energy cooperation deals with China are another promising sign.
Technical matters: Technical analysts rarely agree with fundamental triggers for market fluctuation, but even they disagree that equity market growth signals a decoupling with the real economy.
“There is nothing to suggest a detachment from the real economy”, said Faisal Merchant, technical analyst and CIO at National Asset Management Company.
“The market is robust, with more foreign than local interest for much of the past few months, which signals strength. Last week the market rose 792 points, and the week before 1100. These are very strong numbers”. The uptrend has continued into Ramadan, though a marginal retracement is now expected.
“We expect low volumes in the holy month, due primarily to reduced trading hours”, Faisal added. The next point of resistance is at 23,400 which, if breached, will lead to the second resistance at 23,800. The nearest support is at 22,800.
Market growth has been led by oil, cement, textile and energy stocks for much of the past half year. Going forward, since these are now over-bid, there is expectation of slight retracement, though they still retain long-term bid.
