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August 11, 2019

Stocks slip to 5-year low on escalating tensions in region


August 11, 2019

The capital market lost seven percent and ended in the red zone for the fifth consecutive week, slipping to almost five-year low because escalating tensions on the border with India and trade suspension between the two neighbours on account of Kashmir issues.

Pakistan Stock Exchange benchmark KSE-100 shares index closed negatively for the fifth consecutive week, losing seven percent during the outgoing week, while evaporating nearly 2,237 points to close at 29,429 points level. During the week, commercial banks dragged the index by 844 points, followed by E&Ps and power which cumulatively eroded the index by 1,374 points.

Participation improved slightly, but continued to remain low with a daily average of 71 million shares traded compared to average 57 million shares traded last week. Rising political noise, including tensions between India and Pakistan, arrest of top leadership of PML-N, and unhealthy corporate results kept the market under pressure.

Scrip-wise negative contributions came from UBL (216 points), OGDC (195 points), HBL (187 points), PPL (176 points) and Hubco (163 points).

Foreign selling was witnessed this week clocking-in at $0.9 million compared to a net buy of $3.4 million last week. Selling was witnessed in commercial banks (USD 4.5 million) and Oil and Gas Marketing Companies (USD 0.2 million).

On the domestic front, major buying was reported by individuals ($10.9 million) and banks / DFIs $3.5 million. Average volumes settled at 72 million shares (up by 26 percent WoW) while average value traded clocked-in at $19 million (up by 44 percent WoW).

Based on NCCPL data, foreigners remained net seller amounting to $0.9 million. On the local’s side, mutual funds remained net sellers of $15.3 million.

Tensions remained high as Pakistan retaliated by downgrading diplomatic ties with India, suspending bilateral trade and closing three out of nine air routes for Indian carriers. Internationally, China weakened its currency, which crossed RMB 7/USD for the first time in more than a decade, and halted agricultural imports from US which totalled $9.3 billion in 2018 (almost 8 percent of China’s total imports of goods from US).

An analyst from Spectrum Securities said the rising geopolitical tension between Pakistan and India on Kashmir issue, declining international oil prices, expected slowdown in world GDP growth and uncertain situation in domestic politics were the major reasons behind this sharp decline. An analyst from Arif Habib said that with the index on a hiatus for Eid break next week, “we believe investors will find time to cool off and breathe a sigh of relief”.

The analyst advised market participants to reassess the index level and the recent bloodbath, as value buying opportunities have opened up. In the immediate-term, result season could dictate performance of certain scrips.

An analyst from BMA said attractive valuations on offer (KSE-100 index trading a 59 percent discount to MSCI EM as compared to historical average discount of 27 percent) would not go unnoticed for long and eventually draw inventors to the local bourse.

As per BMA estimates, Pakistan’s market was trading at a 12-month forward P/E of around 5.8x lowest since CY09. Currently KSE-100 index earnings yield stands at 18.5 percent versus 12M T-Bill rate of 14.2 percent, resulting in a discount of 4.3 percent against historical average of 1.5 percent.

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