By: Research Department, Invest Capital Markets Ltd.
In today’s Value Seeker, we present an excerpt of our annual investment strategy report for 2012, to be released later today. In this report, we have discussed Pakistan politics, the economy and the capital market outlook for 2012, along with drivers and risks. We have also provided recommendations on potentially outperforming sectors and stocks for 2012.
Pakistan Politics: We are all Revolutionaries now, addicts of change!
After an increasingly noisy few years, Pakistani politics enters a thrillingly suspenseful phase (last year of present setup’s term) with a change in its run-of-the-mill and repeatedly-tested-and-failed political party-theme as new political alliances flex muscles for political power. Dictatorship regimes in Pakistan have always been good at delivering better economics. However, the stated position of the current military leadership being supportive of democracy is encouraging.
Economy: The edge of the road
Challenged by its own set of problems, sustained economic growth remains a far cry in Pakistan, as it continues to lag region’s. Initially targeted to grow by 4.2% during FY12, persistence of numerous issues including partial floods in the country coupled with ongoing energy crises makes it difficult to achieve this target. The estimate was later revised to 3.6% while SBP also projects the same to stay in the range of 3-4%. We expect the country to continue to lag the region in terms of economic performance at least in the near term. However, our long term view on the economy is bullish, backed by our conviction in better governance ahead and efficient utilization of indigenous resources, as a result.
KSE100: Oil, Fertilizers, Banks, Cements, and IPPs to lead index target
The KSE100 is expected to yield a capital growth of 20% YoY in 2012, given the expected resolution on the key issues of Capital Gains and margins on existing financing product. Moreover, total index return is expected from i) corporate earnings growth of 13% (against last 6Y CAGR of 8% ii) regional EGrowth, DY, PE, EV/EBITDA, PEG and PBV discount adjustments to historical levels and iii) forecast of intrinsic/justified/current PE and target prices (Dec-12), which yield a weighted average index target of 13,656pts by the end Dec-12. Key sectors offering values out of InvestCap Universe are Oil & Gas, Power, Fertilizer, Banks, Telecom, Textiles, Chemicals and Cement.
Key investment Drivers and Risks to keep an eye on in 2012
The key drivers to push current index to the target levels in 2012 would be 1) early resolution of the lingering CGT-MTS-related issues, 2) foreign funds flows back into the Asia Pac region, 3) further cut in the interest rates (and rates on gov’t saving schemes), 4) much-awaited privatization process, 5) M&As in the banking sector (for MCR) and 6) higher-than-expected earnings growth and payouts by the corporate sector.
On the contrary, risks to equity returns in 2012 would be 1) further delay on CGT-MTS-related issues, 2) continuity of foreign outflows from Pakistan as well as the region, 3) increased political crises, 4) any upward reversal in interest rates, 5) no resolution on the circular debt and, 6) larger-than-expected PKR depreciation against the USD in 2012.