Though in a relatively subtle way, Pakistan equity market (PSX’s KSE-100 Index) bounced back strong in the very first month of 2019, closing the monthly return in double-digits at 10.1 percent – at a 2-year high (last highest monthly return recorded in December 2016 at over 12 percent).
Last year, KSE-100 lost 8.4 percent in Rupee terms (26 percent in USD terms), while the month of January 2019 alone recovered 10.1 percent; more than what the index lost in the entire 2018 in rupee terms. KSE-100 Index appreciated by a massive 3,733pts, to 40,800pts level during the month. However, the average daily volumes, at 133 million shares, were slightly up (+4.0 percent MoM), while the traded value remained low at $44 million during the month. [the_ad id=”31605″] An interesting development took place in the last 10 days of January 19 on the foreign investors’ front. Foreign flows at the PSX dramatically turned positive on a net basis throughout the last 10 days of the month, as net foreign inflows clocked in at a solid $27 million, only in the last 10 days.
This started especially from around the announcement of the investor/business-friendly Reform Package (mini budget with much-needed tax relieves/some structural corrections) by the incumbent Finance Minister Asad Umar, after which the total number of corporate taxes finally came down from a huge 47, to as fewer as 16.
In total, the month of January 2019 saw net foreign inflows at over $16 million – last time the market saw monthly net foreign inflows was in January 2018, when the market received net monthly inflows of over $86 million, after which there were continued net monthly outflows from the foreign investors side, totaling $536 million from the PSX in 2018.
Investor-friendly measures taken in the recent reform package (direct/indirect relief for capital market), gradual recovery in investor confidence/sentiment vis-a-vis country’s macros amidst unprecedented eco/trade deals (planned FDIs/timely cash supports/enhanced trade on deferred basis) with friendly countries totaling $30 billion followed by visits of their top political leaderships reinforcing eco/trade/strategic support, alongside Pakistan equities trading at deep-discounted multiples (market PE traded even lower than its last 5-yr average, with fwd multiple falling below 7x earnings), have all made Pakistan equities very difficult to ignore, resulting in a solid recovery in Janury 2019.
This was despite the massive interest rate increases (fixed income pulling liquidity) and currency devaluations.
Though macro challenges are still rife, mostly surrounding the fiscal deficit, needed flows from friendly countries with significant FDI in the pipeline; oil down 35 percent (blessing in disguise from federal tax/CPI perspectives) thereby supporting fiscals while subsiding external risks (CAD to be reduced by 37 percent/$7.0 billion in FY19); major subsidies/energy costs (electric/gas) already passed on while overall tightening continued, thereby improving country’s position with foreign lenders, especially the IMF; improving country risk premia (Pak Eurobond yields significantly down), with street consensus for PKR/US$ parity arriving within the 5-7 percent deviation of current levels (bit comforting for foreign investors), and KSE-100 still trading at huge discounts to the region and historical averages, all indicating Pakistan equities still offer substantial upside and stand with more long-term traction than any other asset classes.
By Khurram Schehzad