Pakistan equities ripe for the picking after China rout

Based on the economy's fundamentals, the equity market is recovering fast while the China factor is fading away.

Despite the Pakistani stock market plunging on the back of the Chinese market turmoil, the country's central bank insists there is "no threat to the economy."
Based on the economy's fundamentals, the equity market is recovering fast while the China factor is fading away. The benchmark Karachi Stock Exchange Index - KSE-100 - rose to 34,447.47 on Friday as the market closed.
The index had risen to an all-time high of 36,223 the previous week. The market is still short by 1,775.33 points to reach that all-time high, but the recovery is good if one looks at the size of the plunge on August 17, also referred to as Black Monday.
What was the pre-slump state of the equity market and the economic fundamentals?
Amreen Soorani of JS Research attributed the pre-slump rally to "anticipated healthy corporate result announcements in the ongoing dividend result season, soft inflation numbers for July and the World Bank offer of $2 billion to Pakistan. Lower-than-expected inflation once again built hopes of another cut in the benchmark bank interest policy rate." "The political environment is also doing fairly well," Yawar-u-Zaman of Shajar Research said.
"A lower inflation rate pushed up buying appetite among investors for leveraged stocks," analyst Abdul Azeem said. That was the general sentiment in the pre-plunge week.
Good news
Then the China stock market turmoil hit the world, especially South Asian equity markets and exchange rates. Amid this gloom and doom, there was a breath of fresh air from the central bank.
Ashraf Mahmood Wathra, governor of State Bank of Pakistan (SBP), the central bank, said in a statement: "Despite turbulence and panic in the global financial and stock markets, there is no threat to the Pakistani economy."
However, hit also by the devaluation of the Chinese currency, the dollar-rupee parity remains a cause for concern. The greenback climbed to an unforeseeable high of Rs104.80 during the week. However, over the weekend, the greenback was trading at Rs103.60 for buying and Rs103.80 for selling in the inter-bank market. But in the open market, it was trading at Rs104.50 for selling and Rs104.75 for selling.
Interestingly, the Pakistani currency had fallen to Rs110 to a dollar during the last days of the outgoing government of Pakistan Peoples Party under then president Asif Ali Zardari. The currency recovered to Rs98 to a dollar during the government of Prime Minister Nawaz Sharif. However, in the last few  months, the rupee started depreciating again, even before the China crisis hit.
The latest rise of the dollar resulted from the China stock market turmoil and the annual haj season. Thousands of Pakistani pilgrims go to perform haj and buy millions of dollars, Saudi riyals and UAE dirhams to pay for their expenses and shopping in Saudi Arabia and the UAE while returning home.
Stemming depreciation
The SBP moved quickly last week to stem the rising tide of the greenback and the rupee's depreciation.
SBP directed all commercial banks to "stop forward booking of US dollars" and said "SBP may impose up to 50 per cent cash margin on opening of every letter of credit of luxury items."
The central bank had already allowed foreign exchange companies to bring into Pakistan an unlimited amount in dollars after selling non-dollar currencies abroad. The facility, aimed at increasing the dollar supply in the market, is for two months, which started on August 30.
Overall, the stock market recovery and the strong economic fundamentals are good news for the government, Pakistan's foreign business partners and people who had started benefiting from falling oil and commodity prices.
Let us see what the general economic scene looks like in the near future. Investors' confidence in the profitability of equities is still high. It is demonstrated by the fact that foreign investors who had purchased equities totalling $1.9 million in the dark days of August 17 to 24, again purchased $16 million worth equities on August 25. Overall, the withdrawal of foreign investment from the KSE is much smaller than new investments, stock market analysts said.
Analysts' views
Arslan Asif, senior equity fund manager at JS Investments, said: "KSE-100 is historically traded at a 45 per cent discount to the neigbouring market. Now, though after markets have seen a considerable downslide, that percentage has dropped to around 30 to 35 per cent."
Barring unexpected negative events, it is time for foreign investors to pick up Pakistani stocks as much as they can, analysts said.
Fahad Qasim of Topline Securities said: "The stability in global markets has helped the Karachi market post modest gains."
Ahsan Mehanti, analyst at Arif Habib Corporation, said: "Stocks closed sharply higher, led by blue chips across the board, recovering global equities and a record surge of WTI crude oil prices."
Faisal Bilani of Elixir Securities said: "Pakistani equities closed the week positive with benchmark KSE-100 testing 34,500 on gains in oil, as higher crude pushed the index heavy exploration and production scrips up."
"The mood in the wider market is upbeat as excitement over macros, ahead of inflation reading, the recent Asian Development Bank package of aid and news over the $45 billion China Pakistan Economic Corridor helped investors ignore domestic politics," added Bilwani.
It looks like the bad dream of the Chinese syndrome is coming to an end.
Views expressed by the author are his own and do not reflect the newspaper's policy.

• Pakistan