KARACHI: Pakistan Stock Exchange benchmark KSE-100 index depicted range bound pattern and ended 8% lower in 2018 due to heightened political noise (election year) and persistent deterioration in economic landscape.
“However, Pakistan market fared relatively better than other emerging markets during 2018,” a noted issued by Pearl Securities said.
Looking back, 2018 was another year of two halves, as Pakistan market delivered 15% return in the first four months before wiping out the entire gains by falling 15% in the later half.
The first period performance was backed by expectations of tax amnesty scheme and government’s resolve to introduce tax reforms.
The second half was dominated by electioneering, rupee depreciation, hefty interest rate hikes and worsening external account and foreign reserves position.
“For foreign investors, Pakistan equities remained one of the worst markets in 2018 as the benchmark KSE-100 index posted its decade’s worst performance in dollar terms, down 27% as dollar gained 26% against Pakistani rupee,” an analyst at Topline Securities said.
The market witnessed highest ever net foreign outflows of $537 million during 2018, net outflow for the fourth consecutive year.
When comparing Pakistan’s market with global equities, KSE-100 index stood out as the world’s 5th worst performing market in 2018, as per Bloomberg (based on total return), closing the year just 1 rank above world’s second largest economy (China) whose market (down 27%) saw an erosion of more than $2.0 trillion worth of market value.
The successful completion of parliamentary elections removed the clouds of political uncertainty hanging over Pakistan market which it celebrated by rallying 10% instantly.
Post election optimism was short-lived as economic hardships quickly dawned on investors, which lead to a loss of 6800 points or 16% in the following months.
“Considering existing situation on the economic front, we foresee turbulence at Pakistan market to continue in 2019 until the government launches a solid and clear recovery plan of action to deal with precarious economic situation,” Pearl Securities report noted.
Analysts believe Pakistan market is likely to continue its volatility next year until key developments on the economic front such as receipt of much needed dollar inflows (China & UAE), decision on IMF bailout program and its conditionality alongwith government’s economic stabilization measures come into play.
Valuations of Pakistan market appears attractive reflecting 39% discount to the MSCI EM and 18% discount from its long term average. The dividend yield of 8% is notably attractive than the regional average.
Analysts do not expect inflows from foreign money managers anytime soon as the rising U.S. interest rates, trade war tensions and weaker emerging currencies have changed their risk appetite.
In addition, PKR has remained overvalued for quite a long and still remains to some extent despite recent episodes of correction.
The complete correction in PKR value and stable currency outlook will aid in regaining foreign investors attention back to Pakistan market.
Due to the prevailing macro concerns and impending austerity measures, the case for upward valuation re-rating appears dim and there are chances market may de-rate further if the situation prolongs/worsens in the coming months.
“We expect market to place relatively more weight on immediate term earnings and less on long term earnings prospects, which is most often the case when pessimism sets in,” Pearl Securities report noted.