On Monday the
benchmark KSE-100 Index lost more than 1,300 points or 5 percent during first
half of the day. Nearly 100 stocks (18 percent of total companies listed at
Karachi Stock Exchange) hit their lower circuits. The Index has shed about 8
percent from its CYTD high.
The most
recent decline is due to further increase in political noise over the weekend,
with the PAT announcing its own long march on Independence Day (August 14) and
the Army calling a corps commanders' meeting on Monday.
In the
absence of a resolution, these developments could continue to drag the market
lower in the immediate-term where the market's regional discount (40 percent at
present) is likely to expand.
The
brokerage house continue to advocate a cautious stance in the immediate-term
but flag that Pakistan Equities are beginning to look very attractive from a
bottom-up vantage as company level fundamentals remain intact.
Now there is
a big question, will political noise rise further? While the market shed 3.1%
last week, strong buying was witnessed throughout the week from foreign
institutions, with net FPI inflow of US$21.6 million increasing CYTD inflow to
US$359.6 million.
In addition,
local participation was also witnessed at the tail end of the week with news
flow pointing towards a potential breakthrough in the political impasse through
talks.
However, the
weekend added to the quagmire with PTI remaining firm about long march plan and
fresh clashes taking place between the police and PAT activists, leading to the
PAT announcing its own long march in the capital on the same day.
Within this
backdrop, the Pakistan Army has also called in a corps commanders' meeting to
discuss the ongoing Operation Zarb-e-Azb as well as the domestic political
situation. While a military takeover still appears unlikely, it cannot be ruled
out completely, particularly if street protests turn violent.
The Pakistan
market has seen its fair share of political crises over the last 10 years;
prominent ones being PPP Chairperson Benazir Bhutto's assassination and resignation
of President Musharraf.
In such
scenarios the market has at an average shed 5 percent during political crises
with the highest fall of 16.3 percent in the week after President Musharraf's
resignation and before the imposition of the price floor.
To date the
KSE-100 Index has shed 8 percent from its CYTD high. Extending this analysis to
the 1990s shows a similar picture (average market decline of 5 percent), with
the greatest loss in market cap of over 10 percent following President
Musharraf's coup. Based on Monday's intraday low, the KSE-100 Index trades at a
forward P/E of 7.9x which is at a 40% discount to the MSCI Asia Pacific
(excluding Japan Index).
Although the
economic indicators are showing a positive trend but political uncertainty is
negatively impacting the market. Analysts recommend investors to follow 'wait
and see strategy' policy till stabilization of the political situation. Local
equities are now trading at a discount. Although, numbers like these have not
been seen for quite some time in recent past. In fact, there are many stocks
which have the potential to provide above-average return going forward.
