MARKET
Pakistan equities have been occasionally, but severely, affected by three major factors, despite mostly being a bottom-up story. These include but are not limited to; i) political uncertainty, ii) security/law and order, and iii) corporate performance.
Of course, these all are somehow interrelated. I call Pakistan equities more a bottom-up story (corporate-driven performance) than a top-down one (macro-driven performance). The listed Pakistani corporations have been highly resilient and performed undeterred in the last many years -- corporate earnings growth averaged well over 20 percent in the last six to seven years. The rate on equity has been 25 percent, which is missing across many frontier and emerging markets. There has been consistent performance despite the country’s bleak and weak economic indicators due to the poor security and law and order situation, and a worsening political scenario.
In the last three years, as political stability and the law and order situation improved relatively, Pakistan’s equity market performed even better with stable corporate performance, while the bottom-up story only became stronger with macros indicators turning better (historic decline in inflation and interest rates driven by decline in oil prices from mid 2014 onwards).
Resultantly, the KSE100 was consistently ranked amongst the top 10 equity markets in the world by performance, while returning 46 percent in 2017 eventually put it on top of Asia, ahead of China and India.
However, the recent Panama issue took a severe battering on Pakistan’s capital market as the KSE100 took a nosedive by about 3,300 points, or seven percent, from a high of 50,192 points to a low of 46,874 points level, in 2017 to date. The total value loss was $6.7 billion from the highest market capitalisation level of over $95 billion, to slightly over $88 billion. Foreign outflows continued and were $160 million in 2017 till date. This all happened just in the last 3/4 months.
This was a much faster decline of the market than the rise witnessed throughout the last year. For instance, last year, the market shot up by 46 percent, or was up by $25.6 billion in value, which was about 15,000 points (from 35k to around 50k level). And, if we compare the recent decline in market value per index point, it was $2 million per index point decline. This means that investors, who stayed invested, on average lost $2 million with every point decline in the index due to the political uncertainty on account of the Panama case.
On the other hand, weighing on the same scale, the 2016 rise in the investment value was $1.7 million per index point increase ($25.6 billion added to the overall market capitalisation in 2016 with ~15,000 increase in the index). This shows that last year's entire rally was even 'slower' than the decline in the market as a result of this political uncertainty, even though the entire political setup was not being derailed.
Furthermore, total net foreign outflows last year were $339 million from the PSX, where per day average outflow clocked in at $1.4 million (partially due to various reasons, including the US Federal Reserve raising interest rates and Pakistan being upgraded back into the Emerging Markets Index, so Frontier Markets funds have been gradually shifting). However, on the other hand, due to the Panama uncertainty, foreign outflows intensified with total net foreign outflows standing at $190 million in 2017 to date, where per day average outflows came around $2.4 million, versus $1.4 million recorded last year - outflow of a million more in 2017 given this added political uncertainty on account of the Panama case!
However, the silver lining, or the saving grace to such massive foreign outflows from the Pakistan Stock Exchange (PSX) was equity mutual funds, and to some extent insurance companies, who have been receiving flush of liquidity from all around. This was thanks to reduced interest rates, newly-implemented taxes/ineffective amnesty to the real estate sector which rendered it almost dead on the deal front - a huge cash market with no other avenues but equities, along with tighter controls on illegal flow of funds both domestically and globally, as information treaties were signed with UAE and other tax-heavens.
These factors in addition to some other consolidated the liquidity for equities. This was possible as equity mutual funds' Assets Under Management (AUMs) were up about Rs50 billion ($475 million) in the last 13 months (from December-15 end to January-17, as per Mufap's report) recording a gigantic growth of 44 percent. Total MF industry's AUMs grew by 37 percent to Rs613 billion ($5.8 billion), of which equity funds' total AUMs stood at Rs166 billion ($1.58 billion), contributing 27 percent to the total MF industry AUMs during the last 13 months.
This raised equity mutual funds' ability to absorb massive foreign outflows to date. Even right post the Supreme Court verdict on Panama case, the market touched its historic intra-day high of over 1,900 points where foreign investors were the net sellers, mutual funds bought about $46 million worth of share in the last two days.
Despite that the Panama case hangs in the balance for another 60 days, Pakistan equities' fundamentals stand firm. Upcoming triggers would include the MSCI Emerging Market upgrade for Pakistan in May-17, followed by $300 to $400 million foreign inflows from tracking foreign funds June-17 onwards. The federal budget too would be a trigger announced by end May-17 with expected relieves on bonus and other taxes amid more development-driven allocations. All this, along with the on-going development hype owing to the China-Pakistan Economic Corridor should keep Pakistan equities in the limelight, though the market might experience increased volatility in the short term.
Pakistan equities' valuations are also undemanding with KSE100 PE/DY trading about 35 percent/50 percent discount to its emerging market peers. So, those who believe in fundamentals should stay invested with no heed given to short-term volatilities.
The writer is the chief commercial officer at JS Global Capital Limited
Market return (KSE100)
46% up in 2016 (+15,000pts) versus 7% down in 2017 till date (3,300pts) from its peak of ~50,200pts
Market value (MCap)
Market cap up by $25.6 billion in 2016 versus loss of $6.7 billion 2017 till date
Market value change per Index point
US$ 1.7 million per index point increase in 2016 versus $2.0 million decline per index point in 2017 till date
Net foreign outflows
$339mn resulting in $1.4 million per day net outflow on average in 2016 versus $2.4 million per day net outflow in 2017 till date
