AsiaNet-Pakistan Premier Editorial Content and Press Release Distribution Service
Karachi, December 05, 2014 (PPI-OT): Focus more on stocks and less on the KSE-100 Index
Having gained an avg. 30% per annum during the past 4 years (CY10-13), the KSE-100 Index continued its ascent in CY14 as well where it has so far risen by 27% in CY14TD and is currently at its all-time high of 32,091pts. In this regard, as per AKD Securities’s conversation with different investors’ AKD Securities sees a sense of fear creeping into their minds regarding index levels.
Resultantly, some of them are fearful and are keeping themselves on the side-lines, waiting for the market to correct itself before they can make an entry. Question still remains whether the KSE-100 Index is a proper representation of stock prices or not? AKD Securities believes that at current levels the KSE-100 Index is not correctly representing the price levels as stock prices are far off from their respective CY14TD highs, mainly due to the fact that the KSE-100 Index is not a price weighted index.
Since the KSE-100 Index is a total return index AKD Securities believes it is better to gauge it on the basis of multiples, where the index does look at relatively impressive levels, offering FY15E P/E of 8.4x and compares favourably when pitted against 5yr high P/E of 8.7x. Keeping all this in mind AKD Securities opines that investors should focus more on an individual stock than the benchmark Index.
KSE-100 is not a price weighted index, stop treating it like one! One thing that the investors should keep in mind is that the KSE-100 Index is a total return index, where it is assumed that any gains arising in form of capital gains and dividends are immediately reinvested in the index. Conversely, the fears that they associate with the KSE-100 Index are those of a price weighted index where price of each stock influences the movement of the index dependent on its weight within the index.
Prices are far from their CY14TD high: Considering KSE100 index scaling at its all-time high levels, the stock prices remain far off from their CY14TD highs, particularly because of KSE100 being a total return index. In this regard, amongst the index heavy weights, both OGDC and PPL are down 24% each from their respective CY14TD highs of PkR287.84/sh and PkR245.61/sh.
Similarly, POL is down 28%, UBL is down 10% and PSO is down 20%. Furthermore, upon looking at yesterday’s closing prices, when market closed at its all-time high of 32,091pts, AKD Securities founds out that 84 of KSE-100 companies are not depicting the same thing which the mentioned index is portraying, where 35 scrips with a cumulative weightage of 32.35% down more than 10% against their CY14TD highs.
If not the Index than what should one look at? Time has now come for investors to stop looking at the KSE-100 Index in isolation and start looking at the multiples market is trading at. Currently, the market offers FY15E P/E of 8.4x which not only compares favourably to last 5yr average P/E of 8.7x but also against 10yr avg. P.E of 8.5x. Therefore, on the basis of pure multiples the market does not look that expensive where AKD Securities’s Jun’15 index target of 35,000 pts offers 9% upside.