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The reasons behind the recent market pullback

The KSE-100 Index has shed 868 points (8.4%) between May 1’10 and May 28’10. This bearish pullback leaves the benchmark Index at 9,521 points, down 10.8% from its CYTD peak of 10,677.5 points achieved on Apr 15’10. The suddenness and quantum of losses has jolted investors and they are rightly asking: (1) What has caused this sudden change of sentiments? and (2) Is this the beginning of a new bear market? In our opinion, the answer to the second question is: NO, this is not a new bear market although we expect volatility to remain high after such a disruptive move. As far as the cause or causes for the U-turn in market direction is concerned, we believe seasonal factors have conspired to zap domestic investor confidence with the tipping point being, reportedly, localized episodes of margin calls and portfolio recomposition by specific institutions. If such indeed is the case, it is likely that the market is oversold from the perspective of Fundamentals. With the AKD Universe trading at a forward P/E of 7.1x, we view the recent correction as an opportunity to accumulate fundamentally strong scrips at knock-down prices.

.AKD Research 
28 May 2010

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