An undervalued PSX

PREDICTING the direction or magnitude of change in the movement of equity securities is a fool’s errand. John Maynard Keynes once said that “the markets can remain irrational longer than you can remain solvent”, and the same has been proven correct time and again. We cannot predict the direction or the magnitude, but we certainly can work with whatever information is available. The equity market in Pakistan continues to be consistently cheap across all metrics — relative to its historic levels, as well as relative to other regional and frontier markets. Market capitalisation, which represents the sum of market value of all companies listed on the stock exchange relative to the GDP, continues to remain lower than its long-term average. Pakistan’s market capitalisation to GDP ratio has averaged around 23 per cent during the last twenty years but remains around 17pc. As long as the government continues on its debt-induced consumption-oriented binge, the equity markets will remain directionless and choppy Similarly, inflation over the last five years has compounded by more than 100pc, but equity prices have yet to catch up to inflation, even though earnings continue to increase. The price-to-earnings ratio is another key metric that one can use to assess whether a stock or market is undervalued or overvalued.