Karachi : The KSE-100 Index closed on 11,648 points on Nov 25’11.
According to AKD Securities, as a result, the Index has now shed 3.1%CYTD on relatively thin activity (CYTD avg. daily volume: 83mn shares; avg. daily turnover: PKR3.7bn), despite resumption of monetary easing and strong corporate earnings. While the broad selloff in equities globally has certainly been a contributing factor, AKD Securities pat-By attribute weakness at the KSE to deterioration in US-Pakistan relations and an increase in political noise. In this regard. the weekend’s attack on a Pakistani check post, allegedly by NATO forces, appears in continuity with choppy international relations post the Osama bin Laden operation while, closer to home, the opposition (PML-N + PTI) has stepped up rhetoric against the PPP-led government ahead of Senate elections in 2012 and general elections in 2013. These factors could serve to restrict valuation rerating (KSE has shed 6.8%FVTD despite cumulative 200bps cut in DR) which could extend subdued performance across Dec’11 although a potential Zin-driven rally in OGDC presents upside risk for the market.
US-Pak Relations: In contrast to the conciliatory tone adopted upon President Obama’s ascension to office, US-Pakistan relations have dearly dipped in CY11 with a steady build-up of pressure on Pakistan. The weekend’s attack on a Pakistani check post, allegedly by NATO forces, is at least the 4th instance this year alone whereby US-Pakistan differences have come into the public eye. Although the US continues to play a supportive role in some areas (e.g. OPIC-driven FDI), there is no lasting letup in the confrontational build-up with could continue to dampen market sentiment.
Investment Perspective: Over the last 1Oyrs, the KSE-100 Index has gained 0.73% on average in the month of December. Ignoring 2008 (post price floor), the KSE-100 on average gains by 4.83% in Dec. While the KSE trades at very attractive standalone valuations (forward PER: 6.3x, D/Y: 8.6%) and its discount to the region (on PER) stands at 42%, price performance in Dec’11 could remain subdued if foreign relations remain choppy. Nevertheless, strong corporate profitability and already compressed valuations should provide some cushion on the downside while any sustainable improvement in global economic dynamics and/or OGDC- spurred rally may unleash latent rerating potential at the KSE.