Global stock markets are tumbling after S&P downgraded the American Treasury bonds from AAA to AA category. Investors are putting their money out of stock markets and prefer to held cash or cash equivalent securities. Investors are having the same attitude regarding Pakistani stock market as well. I can explain to you that the stock markets (both Pakistani and International) have just responded too much. There are four reasons for this view. These reasons are described below:
1) First, S&P had already regarded the American Treasury bonds as having a “Negative Outlook”. What does that mean? When S&P regard something as having a negative outlook it means that it believes that there is strong chance of downgrading. All “Investment Gurus” and investors knew that Treasury bonds could be downgraded. This means stock markets must have taken this factor into account already; most of the world markets are very much efficient, isn’t it? If they are then current situation could be just a temporary phenomenon.
2) S&P is just one of three major credit rating agencies. Moody and Fitch, the other two credit rating agencies still regard treasury bonds as “AAA”.
3) Check out the profitability of American Companies, they are showing a very good progress.
4) The fourth reason is specifically for Pakistani Stock Market, many investors here believe that we could see what we have seen in 2008. Well, I would ask them does inflation stand at 25% as it was in 2008. The answer is certainly no; it is at around 13%. Is Rupee depreciating as it was in 2008? The answer is no; it is stable at 85-86 rupees/dollar and has been there for a year. What about foreign reserves? Is it depleting? Certainly not, they are at historical levels, around 18 billion dollars. External account is safe and remittances are increasing. Secondly, corporate profitability is still intact and growing. Where do we have a situation like 2008? I am not suggesting at all that Pakistani economy is having a satisfactory performance. We are still having a very poor run and going through a very ordinary phase but that does not mean that we have reached a position where our stock market does not deserve any further investment. Third and most important point, our economy is very much isolated from international markets as most of our financial institutions are locally invested.
Now let us come back to the Pakistani stock market, it has gone down by almost 13%, for me it is a good time to invest. Because of the above four reasons I believe current turmoil in International stock markets and especially Pakistani stock market is temporary and providing us a good opportunity to invest. My favorite stocks that I believe have gone down just a bit too much and have a great upside potential are:
1) Engro (Current Price= 123)
2) NML (Current Price= 38)
3) DGKC (Current Price= 20)
4) APL (Current Price = 321)
5) FFC (Current Price = 152)
6) Lotte Pak (Current Price= 10)
Thanks and Good Luck!