With a countrywide movement to unseat the federal government in its fourth month, many retail investors in the stock market seem unnerved.
In view of the Karachi Stock Exchange (KSE) 100-Index hovering just below 32,000 points, it is not difficult to understand why retail investors feel jittery. Any kind of political disturbance can possibly lead to a steep fall in the benchmark index that is currently trending near its all-time high.
Is it time for retail investors to be worried about an overheated stock market?
While nothing can ever be said definitively about the future of the stock market, the overall consensus among analysts is that Pakistan’s stock valuations are still very attractive compared to regional markets.
According to KASB Securities research analyst Mohammad Fawad Khan, the estimated price to earnings (P/E) multiple for the current calendar year is only 8.2. The P/E multiple shows how much investors are willing to pay per dollar of earnings. A smaller multiple means the market is cheaper and hence offers better investment potential.
A comparison of the Pakistan market’s multiple with those of its frontier market peers, such as UAE, Qatar, Saudi Arabia, Sri Lanka, Vietnam, Kuwait, Kenya and Egypt, reveals the former offers as much as 30% discount over the latter as a group.
According to Khan, the huge discount is despite stronger earnings per share and higher dividend yields. “We continue to see the backdrop for further re-rating given the improving macro outlook, higher earnings visibility and likely liquidity flows,” he said.
Statistics present a quite optimistic picture, but where do the sentiments of stakeholders point to?
While KASB Securities has faced suspension of its trading activities after its parent company went into receivership, the brokerage house hosted its annual Middle East, North Africa and Frontiers Conference for investors in Riyadh and Dubai last week. It took a total of nine leading companies from Pakistan belonging to six key sectors to the conference in which the country was highlighted as a ‘preferred frontier market’.
“Our interaction with Pakistan’s corporates and clients has raised our conviction on the Pakistan investment case. The positive impact of the drop in oil prices on macros is not fully appreciated,” KASB Securities said in a note issued to its clients on Wednesday.
Noting that the drop in oil prices is positive for cement, chemical and textile sectors, it said improving macro stability will underpin higher GDP growth and domestic demand going forward.
Published in The Express Tribune, November 27th, 2014.
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