Pak Strategy: Plummeting Volumes; Cyclical or Seasonal?
- The last three trading sessions have seen a dramatic decline in activity on the stock market with ADTO falling to a mere US$29mn (vs. US$95mn post elections). The last time KSE witnessed such low activity was back in Mar-13. Although some decline in volume is seasonal (related to the EID season), that does not explain the huge slump. The more relevant factor has been the dry-up of foreign flows; from Sep 1st 2013 to date, net FIPI has been a mere US$0.2mn.
- Foreign liquidity has been the fuel on which the KSE had rallied in 2013. 2013 YTD, net FPI has been US$324mn, while mutual funds, NBFC’s, and companies have been large net sellers.
- We find it unlikely that domestic investors, who have been net sellers through the course of this rally, would find the market attractive at current levels. The KSE-100 is currently 16% higher than pre-election levels, and up 31% on a CYTD basis. FIPI flows are also likely to remain subdued till currency concerns abate.
- Market activity is likely to remain subdued until valuations become more attractive or/and there is a breakthrough on peace talks with Taliban, in our view.
Activity Slumps At The KSE; Will It Stay or Will It Go?
The last three trading sessions have seen a dramatic decline in activity on the KSE, Average daily value traded (ADTO) has fallen to a more US$29mn, the last time activity was this low was back in March 2013. This is significantly lower than the ADTO of US$95mn that we have seen post-elections. Some of the impact may be from the upcoming EID break. In 2012 and 2011, we have seen a 10% and 23% decline in ADTO respectively in the last ten trading sessions before that.
Although some of the decline in activity this year may be attributable to seasonal factors, it does not completely explain the huge slump. The major factor has been the drying up of foreign flows – from Sep 1st 2013 to date, Net Foreign Portfolio Investment (FIPI) has been a mere US$0.2mn. Foreign liquidity has been the fuel on which Pakistan’s stock market has rallied this year. CYTD, Net Foreign Portfolio Investment has been US$324mn, whilst Mutual Funds (-US$185mn), NBFC’s (-US$81mn), and companies (-US$92mn) have been significant net sellers. Banks and individuals have been net buyers, albeit in a modest quantum of US$41mn and US$39mn respectively.
What Can Trigger Excitement Now? Cheaper Vals; Breakthrough On Peace Talks
The KSE-100 on April 30th (pre-elections) was at 19,982 points, and at yesterday’s close of 22,080, is trading 16% above that level. 2013 YTD, the KSE -100 is up 31%. We believe it is unlikely that Domestic Investors, who have been net sellers through the course of this year’s rally, would find the market attractive at current levels, particularly given the rising interest rate outlook. In our opinion, additional domestic liquidity is only likely to come through at cheaper valuations.
Foreign liquidity and sentiment, on the other hand, seems to have been impacted by recent currency volatility and weakness. As a result, the outlook on recovery in FIPI flows in the short-term remains unpromising. In the medium-term, successful peace negotiations with the Taliban would be the key to attract more investment. On the balance of risks, market activity is likely to remain subdued until 1) a further market correction makes valuations more enticing for domestic investors or 2) a break-through in peace talks with the Taliban unlock the next wave of foreign flows.