Pakistan Stock Market - Grass does look greener
Reasons to Invest.
Pakistan Stock Market has seen many swings. No wonder people often associate Pakistan’s Stock Market, Economy & Currency with boom-and-bust. The problems nearly always begin their roots with Balance of Payment crises. In simple words, country runs out of $ (foreign currency) to pay for imports with their $ earnings (Exports & Remittances). Hence, we knock the doors on and off. This time is no different. Nor is Karachi Stock Exchange.
Stocks are an asset class. In simple words, one of the “assets” where people invest their money in. There are plenty of other assets as well; Fixed Income, Real Estate/Property, Commodities, Businesses, Bitcoin & Education as well. Let’s focus on why Stock Market is expected to do good over medium term;
Risk Free Rate: Interest Rates & Risky Assets class move in opposite direction. In a bust, interest rates rise whereas Property & Stock Market returns usual fall. For finance students, the discount factor change affects the “Net Present Values”. In addition, when investors earn lesser returns on their bank deposits/defence savings certificate, they naturally tilt towards risky assets to seek higher - higher than inflation - returns. Thus, with foreseeable lower interest rates in the medium term, money would trickle to Stock Markets. Theoretically & empirically.
Valuations: Usually investors look at the recent trade. Starting with the stock market has already increased 15,000 points from bottom values. Will it continue to move upwards? Without digging deeper into the details, asset valuations are still lucrative for long term investors & growth outlook has only improved. Pakistan’s Stock Market Price to Earning/Price to Book/Dividend Yield is still fairly good entry point.
Economic Growth: Economy is finally moving into the growth zone. This time the lower interest rates seem to be there for next two quarters (barring a 50-75 bps hike) supported by Remittances, Exports & eventually, FDI. SBP’s TERF financing approval of Rs +500bn is likely to create capital for higher growth potential as well. Although, there are no visible signs of 5-6% sustainable growth yet, in near term nonetheless, FY 22 & FY 23 do show a modest 4-4.5% modest growth signs.
Liquidity: Investor psyche dictates that herd community kicks-in in a rising market. As the KSE-100 touches near highs of 53,000 and above, investors feel more confident about the next business cycle and jump in at even higher levels. At the moment, there are concerns over multi-year views as structural reforms such as, SOEs privatization, Power Sector inefficiencies, Tax collection, Export diversification & Agriculture yields improvement haven’t seen tangible improvement. However, the “chase the rise” factor would eventually bring retailers, mutual funds & insurance companies to buy the "loooong term growth story” and that’s where the peakyness of the market is visible in the form of double digit P/Es of the market. We are well away from that today. It does come.
Digital Retailers: With the advent & mass acceptance of smartphones, cheap internet, digital account opening, young population is increasingly tilted towards investments/trading in capital markets. Stock Market does have its own appeal and charm around it. Often investors find it as a means of migration to upper class. That’s not really - and always - the case. Let that sink in. Poor investment choice, excessive leverage, concentrated portfolio & economic/political factors have all the tendencies to take your from riches to rags. That given, slowly but surely, retail participation is increasing. I am afraid markets usually have peaked when they come in. That’s where regulators need to manage risk & widen stock market depth by encouraging IPOs to prevent concentration of wealth in supply-starved stock market.
Balance of Payments: Thank god, shale producers, EVs, Renewable & reduced air travel that international oil prices are not at $100 a barrel. Pakistan is structurally unprepared to be ready for such a huge exogenous shock. Thus, in covid days, Pakistan has seen much higher remittances, curtailed outward travel, Roshan Digital Accounts inflows, Debt reliefs & IMF supported debt inflows. These have culminated to a much comfortable FX reserves & Current Account positions. Current Account below 2.5% of GDP per annum ($6-7b) is a bullish scenario for growth. Rupee, too, looks solid at Rs 156/USD given SBP’s expectations of 1% CAD in FY21, reduced travel due to lesser summer holidays & religious tourism & staggered import pattern of TERF machinery. It is strongly believed that with current discount rate & currency stability, imports would rise much faster than exports and can create disequilibrium unless exports rise at double digits pace.
India-Pakistan détente: Jet fight with India was a panic button for local & foreign investors. In those scenarios, investors generally come into “all bets are off” mood. However, thaw in signs are visible. Firstly, Pakistan and India have agreed for a ceasefire. This would be followed by FM’s meeting in Dushanbe with India’s FM. Talks on water dispute would resume also. Pakistan’s Army Chief has reiterated extend hands of peace in all direction thereby creating an environment for peace in the region. The coast (hopefully) looks clear for investors over short to medium term. Peace dividends are real & huge. Don’t underestimate those.
In a nut shell, without going much into detailed numbers, sector calls & stock recommendations, the broader items explained above are generally the factors we must assess while investing in the market. It’s not too late for educated investing. Don’t speculate much, take stocks as an asset class. Show them respect, they should pay in kind. InshaAllah.
Disclaimer: This is my personal blog. There may be differing views. The aim of the writing is to support/remind investors in their investment decision making process. There could be inadvertent factual errors. Investors are advised to do research, diversify & manage risks while investing. Your feedback is important.