KSE 100 Rocking!!

It seems that Indian and global (read ‘developed’) markets have finally de-coupled – a theme that people used to talk about immediately post the financial crises. This decoupling means that the US markets are rising and the Indian indices are heading lower!! In fact it is the whole emerging markets bunch that is feeling the heat and some people feel that there is more pain to come. It was this post here that inspired this entry of mine. As you can see in the attached, the BRICS bellwether indices are languishing in the bottom quartile of all the countries tracked there. Interestingly, whenever I have seen similar country stock market return rankings, I always remember seeing Pakistan amongst the top. That piqued my interest and I did some digging around a few days back to test a hypothesis that had formed: since the Pakistani market may not be deep enough, and since it is very volatile therefore perhaps it may have dropped much more than the Indian market post the 2008 crisis. The recovery, therefore, would be higher in percentage terms as compared to India. Pakistan also has inflation. It is perceived by many to be politically more unstable than India. So what’s making FIIs pump money into Pakistan (and Phillippines, etc) on one hand and vaccuum it out of India (and other large EM markets)? What is it about Pakistan bourses that makes hot money go there ignoring the seductive siren song of rising yields in the US? Surely it cannot be asset allocation based weight correction. It doesn’t seem to be an expectation of political stability either. Perhaps it is a feeling that the market is undervalued on a relative basis. Relative to what? The emerging basket? It’s neighbours (India, China & Russia)? Or it’s past? Whatever the answer, I kept coming back to my hypothesis. So some downloads from Karachi Stock Exchange and the NSE and some number crunching/charting yielding the following perspectives:

KSE vs NIFTY historical

Parabolas are very scary. It seems as if of late the KSE 100 is rising us as if KSE 100 = A x t squared. where t = time. Now parabolas require massive amounts of energy to sustain themselves. In the context of the stock market, more money needs to be continuously pumped in for every unit of time elapsed. According to me, if the KSE 100 and it’s ilk form your scene, it’s time to short.

KSE vs NIFTY historical normalized

KSE 100 vs our Thrifty NIFTY

Two news topics on Pakistan – the air crash and accounts of the new found bonhomie between India and Pakistan gave me the thought to look up the stock market there. I was a bit lost trying to find out historical data on the KSE 100 (Karachi Stock Exchange – 100 stock Index). It’s certainly not available on the KSE website for people like me. The exchange, set up during Partition in 1947, actually sells that data! So I got it from the yahoo!finance website instead – but hold on a minute! Doesn’t this mean that…nevermind. 😉

As is my wont, I plotted NIFTY data for the period corresponding to the KSE 100 data that I could find on the internet. The result as you can see in the chart above is astonishing indeed. I mean – I don’t just get it. Neither does this paper that I scourged from the internet which inter alia says:

…the analysis of KSE 100 Index reveals serious structural flaws in true return of the companies in the Index and it is unable to represent the economy. These conclusions pose a serious threat to the use of KSE 100 Index as a benchmark for market return in Capital Asset Pricing Model (CAPM) in fair value calculation of Pakistani stocks. This also creates doubt about the forecasting ability of KSE 100 Index about the GDP growth rate of Pakistan.

Indeed, the paper does note that the correlation between GDP growth rate of Pakistan and what many consider to be its benchmark equity index is quite low. Who knows – maybe there is a flip side to what I learned today which may explain what meets the eye. The NIFTY on its part may also lend itself to some criticism for all you know.

However, I for one is quite happy for what the folks at Dalal Street have done recently to the Sensex – they caught up with the NIFTY in one aspect by including Dr. Reddy’s Labs into the Index!!!! Cool. 🙂

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