Pakistan Market Outlook 2013: Glass half-full : Research of the Week
By: Shajar Capital Pakistan (Private) Limited.
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With the onset of 2013, Pakistan is once again looking at itself through a half-full glass amid caution on the macroeconomic front and as the second consecutive democratic general elections approach. Against this backdrop, the incoming government needs to focus on structural reforms and investments in infrastructure alongside a strict governance regime to arrest the slowdown in economic activities. Looking at the stock market, a bull run has propelled the benchmark KSE-100 Index upwards by 50% since Jan 1’12. Going forward, the sustainability of this bullish momentum is very heavily dependent on arresting nascent BoP risks and upon future political stability. Statistically speaking, the CY12 bull run on the KSE-100 Index has not completely reflected in fundamentals as PE based valuations are currently trading at approximately -0.50 standard deviations below the 5-year historic average. On fundamentals, the KSE-100 Index trades at an attractive forward PER of 7.02x and at a forward dividend yield of ~8%. Valuations remain attractive and we expect the benchmark KSE-100 Index to reach 19,300 points by Dec’13 as Pakistan’s risk premium converges to historical levels.
External account instability is the key risk to KSE: After aggregate cuts of 450bps since June’11, the DR has reached 9.5% after the latest 50bps cut in Dec’12. Despite avg. CPI expected to clock in below 9.5% in FY13, upside risks to the DR exist in the form of weakening reserves (SBP reserves are down ~21%FY13TD) and their consequent impact on the currency (PkR has depreciated by 3.03%FY13TD vs. the USD). In this regard, the current account has recorded a deficit of 0.4% of GDP in 5MFY13 and we expect the same to post a deficit of 1.5% of GDP in FY13 with materialization of foreign inflows as the key swing factor to counter sizable upcoming IMF repayments.
With continuous depletion in reserves, we believe re-entry into the IMF program (to be accompanied by political ownership and much needed structural reforms) is a question of ‘when’ instead of ‘what if’.
Political environment is equally important: Pakistan is set to go through the process of its second consecutive democratic election which sets the stage for confidence building in the political system of the country. In this regard, we believe that political majors would be marginalized to provinces raising the prospect of another hung parliament and post-election negotiations determining the next ruling coalition. That said, confrontation and conflict free general elections should lead to a higher degree of political stability. On the flip side, if the second consecutive democratic elections are marred by conflicts or are delayed, focus from the all-important and much needed task of economic management may deter, leading to dented investor sentiments.