December 25, 2023 (MLN): Human beings suffer from short-term memory loss. The recency effect is more pronounced in capital markets. If the last few moments (any time factor) have followed a trend, the future is wrongly presumed to replicate the same. Thus, with an extraordinary 60% rise in KSE -100 in two (2) quarters, people are panicking over a 7-8% correction.
The hundred-million-dollar question is "Now what do I do". This is a classic dilemma faced by investors who entered late, doubled their exposure, or were negative on the market from the the beginning. It's critical to always assess with a historical perspective – when I doubt, go back to fundamental analysis.
First, the P/E of the market has re-rated to 4.5-5x but is far from a long-term average of 7-8x. Thus, maybe this is the new normal or maybe not. You have to take interest rate bets over the next 3-5 years.
My homework suggests a sustainable interest rate – when the US Fed is at 4-5% – for Pakistan remains 15-18% until we grow exports and fix in-house efficiencies. With that assumption, do not expect a P/E of 8x to happen in the short to medium term.
Nevertheless, the "E" denominator in the much-touted P/E ratio will be the key. Fund Managers and Investors would have to put double the efforts to find the stars within the PSX multiverse. Outstanding companies are trading at very low "cyclically adjusted earnings fair P/E" and many have earnings expected to grow north of 15-20% sustainably. Do your homework.
Also, do not forget the bigger picture. The correction in some stocks has been much sharper (15-25%) from the peak compared to blue chip companies' 7-15%. REMEMBER – watch the signs of euphoria. The leverage was exceptionally high and people were borrowing at 30% yield trying to make a quick buck. They will be disappointed.
Beware of the run-ups in penny stocks with unfounded or much yet-to-be-materialized stories. There is no harm in buying a "potential event" that unlocks valuation and creates a turnaround. But retailers start with small tickets, high volume and speculative stocks to "join the bandwagon".
Always note the churning turnover of volume as compared to % of free float. Invariably, one clearest indicator of a bubble is that a significant proportion of shares are traded in a day, week and month. That is theoretically illogical and often a sign of pump and dump with such a high velocity of exchange of hands. I wish brokerage charts show that someday in their indicators too.
Short conclusion:
- The medium-term story is far from over. Unfortunately, fixed-income investors happy with 15-20% returns would conveniently see the index rising driven by smart investors with higher purchasing power and experience. Foreigners would continue to re-rate the market along with specialist family houses with decades of experience and spare liquidity.
- Be mindful and cognizant of imminent triggers. In the very short term, fundamental events such as:
- IMF's Executive Board approval in Jan would unlock USD from ADB, WB, and AIIB extra to prop FX reserves upwards. There is a very strong correlation b/w PSX and SBP reserve.
- The election outcome if expected to be market friendly government would re-rate the market a few weeks later until the first news of going to IMF for bailout is public.
- First and second interest rate cuts will bring the edgy investors back in the ring, re-rate KSE 100, provide relief to leveraged companies and create a feeling of "beginning of monetary easing".
- These three factors hopefully within 3-4 months provide a sufficient flow of positive news that can continue to re-rate the market and attract more capital.
Don't expect upward and onwards ONLY. Remain disciplined, stocks are and will always remain a risky business. Make your game plan and strategies – own regrets of your own decisions, not your brokers.
The author is an independent economic analyst and writes on Twitter and Linkedin.
Posted on: 2023-12-25T18:04:01+05:00
