After two gloomy years of negative stock returns (-15 per cent for 2017 and -8pc for 2018), equities managed to provide a 10pc return for 2019, thanks to spectacular 42pc gains recorded in the last four and a half months when the KSE-100 index rebounded on Aug 16 from its five-year low of 28,765 points to close at 40,735 points on Dec 31.

JS Global in its “Pakistan Equity Strategy, 2020” report observed that the KSE-100 index made the grand pullback in a fashion that is typical of stock markets. It recommended avoiding short-termism and to look beyond calendar year 2020.

“Regardless of how or where we look, we find significant room for improvement in Pakistan,” it said, adding that a small example was Pakistan’s export-to-GDP ratio, which was not only lower than its historic average but also among the lowest in the region.

The potential upside was, therefore, highest. “If the promised reforms are delivered, the stock market will indeed have gone through hardships to the stars,” it said, setting the index target at 52,500 points based on the traditional target price, price-to-earnings ratio and price-to-book value methods.

‘The market is set for a re-rating in 2020 on the back of a recovery in corporate profitability amidst improving economic numbers’

Sector-wise, JS Global said it was positive on banking, energy exploration and production, oil marketing, cement, textile and steel (long) sectors. It marked steel (flat), power and fertiliser sectors as neutral while placing automobile and refinery sectors in the negative zone.

Stockbroker Arif Habib told Dawn that five sectors hold as much as 70pc weight in the KSE-100 index. They include oil and gas exploration and production, power, banks, fertilisers and textiles.

Mr Habib observed that power and energy exploration and production sectors were insulated from the vagaries of currency instability as their tariffs were dollar-based. The segment is also enjoying the benefit of rising oil prices.

The profitability of banks is also assured owing to a high interest rate. Fertiliser firms are posting ample profits. The textile sector is on balance a beneficiary of the rupee devaluation as the replacement value of the expansion will now be far higher than the plants that were set up earlier. Mr Habib pointed out that it was mainly these five sectors that had sparked and fuelled the bullish rally since August.

He said the other three sectors that have been laggards — cement, steel and automobile — together hold just 16pc weight in the index. “Exchange Traded Funds (ETFs) — a new product that will soon be launched — will attract more liquidity into the market,” he said, pointing out that ETFs had more money under management than all mutual funds combined in most advanced markets.

A fund manager, who has Rs85bn under management, exuded optimism. Asking not to be named, he said the major reasons that triggered the August 2019 rally were the stability in the exchange rate, inflow of $1.43bn in treasury bills, decline in the Pakistan Investment Bonds (PIB) yield by 286 basis points to 11pc, increase in foreign exchange reserves by 50pc to $10.9bn, favourable quarterly review by the IMF and, above all, the 73pc improvement in the five-month current account deficit.

The fund manager said that in 2020 Pakistan might appear prominently on the foreigners’ investment radar as the fear of further devaluation had receded and the rupee had gathered some strength against the dollar. In 2019, foreigners became net buyers of shares worth $58 million after four consecutive years of aggregate outflows amounting to $1.68m. Furthermore, via the recently promulgated National Accountability (Amendment) Ordinance, the double taxation regime for foreign corporate entities has been streamlined.

In its “Pakistan Strategy Report,” Topline Securities expressed confidence that equities were likely to reap the benefits of structural and economic reforms, which had been a long-drawn process.

“The market is potentially set for a further re-rating in 2020, in our view, on the back of recovery in corporate profitability amidst improving economic outlook, increasing cash liquidity and greater flexibility of the incumbent government towards its predecessors.” It set an index target of 49,000 points by December 2020.

If one speaks to small investors, they are not much enthused by the ongoing market rally. Without any holding power, most small investors sold their shares in the market meltdown of around two and a half years. Although the run-up to the index rise was led by individuals who bought equities worth $30m — ahead of institutional investors and foreigners — they are mostly high-net-worth individuals (HNWI). Most small investors who mainly dabble in second- and third-tier stocks and who still hold their shares have not recovered even half their peak price of May 2017.

Analysts caution that there are potent risks that can jeopardise all the carefully considered bullish opinions. One of those risks is from the Financial Action Task Force (FATF) that still hangs over Pakistan like the proverbial sword of Damocles. Although the government is confident it would be able to ride out the challenge, the worst-case scenario of Pakistan getting blacklisted can lead to grave consequences.

Secondly, there is always the danger of a flare-up on the border with India. Further deterioration in the US-Iran relationship can also weigh down on the market. A hike in international oil prices will be detrimental to the economy as it will directly impact inflation. In such a situation, the much-anticipated monetary easing can be delayed or even lead to further tightening. Similarly, a major shortfall in tax collection partly owing to a very high target can spoil calculations.

Finally, anti-government protests and parliamentary squabbles are not new to Pakistan. But an eventuality of significance can return the market to volatility.

Published in Dawn, The Business and Finance Weekly, January 6th, 2020