Vote of no confidence in stock market

Many stocks have mouth-watering valuations, but market likely to remain lacklustre

Faraz Ahmed March 21, 2022
A 3D printed oil pump jack is seen in front of displayed stock graph and "Oil Stocks" words in this illustration picture, April 14, 2020. REUTERS


top of their voices about the mouthwatering valuations at the stock market for quite some time, however, it seems no one is paying any heed to the calls. Faisal Shaji, Chief Strategist at Standard Capital Securities, also agrees that many attractive deals are currently available in the market, but he anticipates a lacklustre performance due to the ongoing political crisis, which has dried up the volume as day traders prefer to remain sidelined and the market is trading in a tight band.

Also, many investors have fears about pressure on the rupee, which has crossed the 180 level against the dollar, and the widening current account deficit (CAD) since international commodity prices continue to spike. Adding fuel to the fire is the recent flare-up on the political front and the continued military campaign in Ukraine with no sign of compromise on either front. International investors remain cautious about the emerging markets post-Covid where Pakistan is ranked the fifth riskiest in the Asia-Pacific region on the Bloomberg sovereign debt default probability scale with the default probability of 13.6%.

Also, the fear of rising interest rates and currency/ external shocks in the emerging markets has kept the global equity investors at bay. Political noise, IMF demands and inflationary pressure have been highlighted as the key impediments by Haris Aslam, Head of AKD Trade Online division of AKD Securities. He is of the opinion that institutional interest is a must to restore confidence in the market at these levels where some blue-chip stocks are trading at the mind-boggling price-toearnings multiples (P/E) of 2x.

Despite the fact that Pakistan’s economy came out of the woods quickly in the region and in fact outperformed in some areas such as gaining some market share in textile exports against regional competitors like India and Bangladesh, this is not reflected in the stock market performance in comparison to the regional peers. This comes despite the fact that textile companies have reported excellent results and are well represented in the stock market’s KSE-100 index.

Even those textile exporting companies’ stocks did not do well at the individual level, eg Nishat Mills, that are still trading at the forward P/E of 1.9x, and are down 21.74% in the last one year. Also, the same question arises when it comes to the listed stocks of oil and gas companies, which are the heavyweight in the KSE-100 index. Despite the continuous rally in the crude oil market, the oil and gas companies in the KSE-100 index, namely OGDC, PPL and POL, did not appreciate at all in value and are now trading at a paltry forward P/E of 2.57x, 3.11x, and 4.88x. Just to put things into perspective, the major oil company OGDC gave a return of -19% in the same period when crude oil surged 150%.

All this indicates the lack of confidence of investors and they are ignoring all the technical and fundamental calls and prefer to adopt a wait-andsee approach till the political issues are settled. Meanwhile, they are focusing on the other more lucrative and easierto-invest avenues such as real estate, gold, dollar and even fixed-income opportunities due to the expectation of an uptick in interest rate as the rally in commodities shows no signs of exhaustion.

There is recent news about some incentives for the stock market investors such as rationalising the capital gains tax slabs in the upcoming budget. However, many market players believe that it will be very difficult to get a nod from the IMF for any tax breaks. Therefore, the settlement of political issues will remain the overriding theme going forward to gain the vote of confidence in Pakistan’s stock market.



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