Nabeel Zafar talks about the difficulties experienced by
Pakistani stock trade
All economic indicators in Pakistan in 2022 mauled PSX were sliding down as political uncertainty badly gripped the country. Last year proved to be problematic for the entire economic activity in the country and it will take a long time to recoup the losses it suffered. Pakistan Stock Exchange was no exception and it shed 9.4 per cent of its value from the preceding year 2021 and finally settled at 40,420 points. Throughout the year the stock trade remained under pressure and kept the share market jittery making it difficult to register any gains. The year was very severe on currency as it witnessed the rupee falling by 22 per cent fall against the dollar and the dollar-based return of the KSE-100 index remained 29 per cent.
Though the downward slide in Pakistan Stock Exchange was steep but it was pointed out that this tendency was in line with international trend throughout the course of the year. Global stock markets lost $18 trillion in 2022 with a drop of approximately 20 per cent in the World Index of MSCI, a provider of global investment benchmarks. It is worthwhile to mention that this performance was the worst since the 2008 financial crisis. Pakistani stock trade suffered most as analysts pointed out that the KSE-100 index was one of the worst-performing markets in dollar terms in 2022. According to the prevailing trend, trading activity on the PSX remained dull owing to macroeconomic issues in 2022. The average daily traded volume in the ready market PSX went down 52 per cent year-on-year to 230 million shares. Similarly, the average daily traded value dropped 59per cent to Rs7 billion which was the lowest level since 2019.
Moreover, in the futures market, volume and value per day were also down 33 per cent and 56 per cent to 94 million and Rs.3.6 billion respectively. The stock market also underperformed other asset classes namely gold along with one-year dollar-based Naya Pakistan Certificate and the dollar. Treasury bills, money market funds and property indices posted returns in the range of 12-14 per cent in 2022. As for the raising of fresh capital on the stock market, only three offerings took place in 2022 as opposed to eight a year ago. The number of offerings was also the lowest since 2019 when the PSX witnessed only one offering.
Foreign corporate selling continued in 2022 with a net sale of $127 million. In the last seven years, foreign corporates have sold shares worth $2.5 billion on the PSX. Local mutual funds and insurance companies also trimmed their equity holdings in 2022. Funds sold $166 million while insurance companies sold $128 million in 2022. Returns in the stock market have either barely beat inflation or been outright negative for six consecutive years. A portfolio of investment that was left untouched since the end of 2016 in the top 100 companies of the stock market would have shrunk by more than 15 per cent in absolute terms over the last six years.
The underperformance of the PSX has raised questions about the future course of action. In this context, many experienced analysts mention that two factors will determine the stock market performance going forward. The first is successful review by the IMF of the loan programme will give economic certainty. Secondly a peaceful national election will introduce political certainty. Currently, the analysts continuously blame political instability for the persistent downward swing in share prices. Some analysts however are skeptical about stability coming back to the stock market as it is widely predicted that the elections will not be able to bring in stability as the chances of no party gaining absolute majority in the parliament that would let the political uncertainty to continue.
Nevertheless, many analysts cautiously state that the market may touch 49,300 points by the coming as it is expected that share prices will gain nearly 22 per cent in the New Year on an average. This assessment is made in the backdrop of the fact that the only option for the valuations in 2022 is for multiple of four to get rerated on the higher side. It is expected that barring any serious handicap the market may start seeing a solid recovery in the second half of 2023. It is mentioned that the key interest rate determines the cost of funds for debt-reliant big corporates and it is expected that it will start dropping around June and July as inflation will become relatively normal as the low-base effect is likely to kick in around the middle of 2023.
In wake of such development, all those cash-rich insurance companies and mutual funds that offloaded their equity holdings in 2023 will switch gears and get back onto the buying side. This will help jumpstart a stock market rally in the second half of 2023 with the index regaining some of the losses it recorded over the many previous years. In this context, investors are expected to look for companies that are posting strong earnings growth and they have done well even in the ongoing economic downturn. It is expected that 2023 is likely to be good for fertiliser, technology and energy exploration and production firms. Technology companies will also gain from a higher exchange rate. Fertiliser will continue to outperform other sectors given that subsidies to agriculture are not going away anytime soon. TW