Pakistan Market: Negativity Overplayed

pakistan-flagOn Monday benchmark of Karachi Stock Exchange, KSE-100 Index witnessed decline of 1,419 points or over 4 percent erosion. While many of the analysts term it a follow up of the global markets, a few have different opinion. They say, ‘Negativity was over played’ keeping in view the historic market behavior.

It is true that almost all the markets witnessed a massive decline, mostly driven by Chinese stock market crisis. The injury was further intensified by dollar movement and prevailing crude oil glut. However, the massive Monday decline of KSE-100 Index has little relevance with the global movement.

Some analysts say that the extreme selling was triggered by a 1.8% depreciation of Pak Rupee (PKR) against the US Dollar (US$) in a single day. Unlike foreign markets, the KSE is a cash based market where an absence of leverage shields it from the multiplier effect that takes place in leveraged markets.

According to an AKD report a historical pattern also emerges where the KSE-100 Index during a 10 year period has posted negative returns in the month of August on seven occasions where it has yielded an average return of negative 3.3%.

On the flip side, historically a bounce back has been seen in the month of September where the market on average has yielded positive 4.5% in the last 10 years. Despite the free fall yesterday analysts believe the market still looks attractive and December 2015 Index target of 37,000 points remains intact, providing an upside of 11.8%.

The PkR/US$ parity depreciated sharply in the interbank market yesterday, losing 1.8% to end at PkR103.84 as regional pressures, triggered with CNY’s devaluation, caught up with the local currency market. PBoC’s decision to devalue the CNY vis-à-vis the US$, regional currencies have witnessed a sharp dip (MYR/US$, INR/US$ and IDR/US$ have shed 6.7%, 3.8% and 3.6% respectively since).

While the PkR had shown resilience till last week with slight losses as the rate touched the PkR102/US$ level, the PkR came under pressure yesterday primarily due to fresh concerns regarding China’s growth prospects, with intraday trade bottoming at PkR104.2/US$ (implying 2.15% depreciation).

So far the SBP has refrained from direct intervention in the market, which if continues could lead to continued losses over the short-term as negative sentiments are likely to keep dollar demand high. SBP’s lack of intervention could also signal a shift in policy change, where a region wide currency downtrend justifies PkR’s depreciation, particularly for the facilitation of exports competitiveness. On the flipside, any intervention to manage volatility could allow the PkR/US$ to consolidate around PKR105 levels during FY16.

Analysts remain firm on P/E re-rating theme and forecast the Index to reach 37,000 level by year-end 2015, providing a decent 11.8% upside from its last close. Furthermore, they expect portfolio re-alignment from all investor classes as certain sectors, such as Banks (can be considered during weakness in the run up to the upcoming monetary policy) and Oil and Gas that is trading at depressed multiples (implied oil prices less than US$25/bbl) and should attract value long investors.

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