The good times are rolling for investors at the Pakistan Stock Exchange (PSX).

The last few months — from July 1 to Dec 6 — have been sensational. The equity market provided a stellar return of 19.8 per cent. In dollar terms, the gain was the highest in the regional markets.

Trailing behind the PSX is Taiwan (9pc) and Thailand (6pc). The Indian market lost 2pc during the period.

In November, the index closed on a positive note for the third straight month and recorded a gain of 15pc, which was the highest monthly index gain in over six years. Last Monday, the traded volume was 558 million shares, which was the highest since May 24, 2017.

That day, the KSE-100 index also stormed past the 40,000-point level for the first time in nine months. Last Thursday, the exuberance of investors also carried the traded value of shares to Rs20 billion — highest since Nov 30, 2018.

Seasoned market players noted that the yield on the 10-year Pakistan Investment Bonds (PIBs) had receded from 14pc to 11.25pc. The yield on the long-term government paper sank below the benchmark interest rate, currently at 13.25pc, for the first time in a decade.

This led the country’s financial managers to cut the rate of return on National Savings Schemes (NSS). Hopes ran high that the fast drop in the yield on fixed income securities — whether bonds, bank deposits or NSS — would bring funds into the equity market.

PSX stands out as the cheapest market in the region with a price-to-earnings multiple of 6.6 against the regional average of 13

The Pakistani share market stands out as the cheapest in the region with a price-to-earnings multiple of 6.6 against the regional market average of 13. Concurrently, the dividend yield in the local market stands at a lofty 5.5pc, which is the highest among its peers that are barely able to eke out an average of 3pc.

Asserting that the stock market is the barometer of the economy, PSX Chairman Sulaiman Mehdi put his weight behind the macroeconomic stability as the reason for the upsurge in share values. In particular, he mentioned the turnaround in the current account balance. “The current account deficit stood at $19.9bn in 2017-18. There is a sustained drop so that the deficit shrank to just $1.5bn in the four months of 2019-20,” he said. He pointed out that the country had posted a current account surplus of $99m in October. The country’s ranking in the ease of doing business jumped 28 places to 108th in 2019. The PSX chairman said that all these factors had instilled faith in the minds of investors who were now beginning to view the future with optimism.

Economic indicators, most analysts say, are showing signs of revival. With the establishment on its side, the present government looks comfortable and hopes to complete its term without having to worry about the fragmented opposition.

Other than these factors, there are reasons specific to the market. Mr Mehdi observed that the drought in the initial public offering (IPO) market was likely to end by March when he expected companies making a beeline for getting listed. The bourse has been functioning without a CEO for six months. Mr Mehdi said the majority stakeholders (Chinese consortium) had provided three names, which would be considered at the PSX board meeting. The names will be forwarded to the apex regulator, the Securities and Exchange Commission of Pakistan (SECP), with recommendations before the end of the current calendar year.

With regard to the ongoing rally at the market, SECP Policy Board Chairman Khalid Mirza asserted: “The market was heavily oversold, which attracted buying at lower levels.”

He said it was accentuated by some good economic news, which had a positive impact on investors’ sentiments.

PSX former chairman Arif Habib concurred that the market had sunk too deep, which was not warranted by the fundamentals. That is why it had to bounce back, he said.

By the end of the year, he said the benchmark index could settle 2,000 to 4,000 points either way. The seasoned broker-turned-industrialist said: “Three sectors — power, banks and oil/gas exploration and production — were expected to present improved financial results in the Oct-Dec quarter. Banks will benefit from higher interest rates while the other two sectors operate on a dollar-based tariff. They will be prime beneficiaries of the strength that the greenback had gathered against the rupee.”

Since these three sectors commanded 66pc weight in the KSE-100 index, he said any improvement in the stock values of such companies would push forward the entire market.

Mr Habib said that cyclic sectors such as cement and steel, which had 16pc weight in the index, together with second-tier stocks were the major drivers of the current rally. This suggests that there may still be room for upside in blue-chip stocks, he added.

A table prepared by brokerage Next Capital shows that individuals have been major buyers with a net investment of $137m in equities since the start of the current calendar year. They were followed by foreign investors who cherry-picked stocks worth $68m. The two biggest sellers were insurance companies that offloaded equities amounting to $73m and mutual funds that dumped stocks worth $175m.

A major fund manager contested the impression that mutual funds were market spoilers. “Some funds may have been compelled to sell in order to meet redemptions. But by and large, most funds were over 90pc invested in equities as was provided by the law,” he asserted.

Published in Dawn, The Business and Finance Weekly, December 9th, 2019