Dubai: Pakistan’s benchmark index, the Karachi Stock Exchange (KSE) 100, has been on a roll for the past 12 months, soaring 40.91 per cent. This year too, the shares have been on the up, with the index rising more than seven per cent and the KSE 100 going past the 18,000 mark on February 22, resulting in it outperforming many emerging markets. In fact, MSCI Emerging Markets (until the end of February 27) was down -0.8 per cent.
“Following last year’s 49 per cent gain, the market is up 7.5 per cent year to date with the corporate result season almost over, earnings have expanded by 25 per cent over the previous quarter and 11 per cent year on year,” said Naveed Vakil, director, Research and Business Development at AKD Securities Limited.
“This also follows positive regulatory developments across key sectors namely chemicals, telcos and downstream oil.”
Furqan Punjani, deputy head of equity research at BMA Capital Management Limited, agreed.
Resilient corporate profits, which are expected to grow by 19 per cent in the 2013 financial year, and a hefty eight per cent dividend yield (the highest in the region) have continued to lure investors, Punjani said.
“Ample liquidity and successive cuts in [interest] rates coupled with higher foreign portfolio investment [$39 million]have led the market to maintain its bull run,” he added.
The flow of foreign funds, a result of the monetary policy of quantitative easing in developed countries making cheap money available to investors, is expected to continue pushing the index higher.
“Continuing unconventional monetary policy from the US to Japan should see unrestricted funds flow into emerging and frontier market assets through most of 2013,” said Vakil.
Politics is also playing its part. According to Mohammad Sohail, chief executive of Topline Securities, the Pakistan market is rallying because of the coming general election, scheduled to be held in May.
“This pre-election rally is in line with previous trends, [with] investors think[ing] that the new government will focus on economic issues and may handle the security situation better,” said Sohail.
Despite some serious concerns about the economy and Pakistan’s debts to the International Monetary Fund, analysts are unanimous on the outlook of the market for the year: the index will end higher.
“Putting aside concerns over government borrowings [and] expenditure, energy shortages and the wobbly local currency, the local equity benchmark index has posted close to 8 per cent [as of February 27] return year to date. [Our target for the index is] 19,800 points by year end, providing an enticing return of 10 per cent combined with an eight per cent dividend yield,” said Punjani.
Vakil said: “We believe the KSE-100 Index can post a 14 per cent gain for the [calendar] year 2013.”
Sohail expects the index to reach 19,500 by the end of the year.
Valuations are still attractive despite the stock index surging 50 per cent in 2012.
According to Sohail, Pakistan stocks are still available at attractive FY13E price earnings ratio of 6.7 times and FY14F of 5.8 times; compared to the 10 and 20-years average of 8. times and 10.2 times, respectively.
“This still compares favourably with the Asian peers,” he added. Vakil agreed. “Our positive outlook is underpinned by strong support from corporate earnings, which are disconnected from Pakistan’s headline economic metrics and undemanding valuations relative to regional peer group markets.”
However currency performance should be taken into account when investing in Pakistani stocks.
“We would continue to advise investors to keep their exposure in dividend-yielding stocks and sectors which are relatively immune from depreciating Pakistan rupee against the greenback,” said Punjani.
Continuing pressure on Pakistan’s exchange rate versus the dollar and election year politics, can work in favour of oil and gas stocks, as well as the power sector, which offers dollar-based returns.
“Cements should have another banner year in 2013 with strong domestic demand [because] of development spending ahead of the election year, said Vakil.
“We also like telecoms, where the market is conservatively holding off on pricing in higher margins, which can result from an understanding on international incoming settlement rates.”