Brighter Days

Arif Habib Limited’s  (AHL) recently released Pakistan Investment Strategy Report for 2022 gives a message of hope for the next year, in spite of the troubles witnessed by the bourse in 2021.

The KSE-100 Index had a particularly challenging outgoing year (2021). This was led by a spectrum of reasons, including political uncertainty following the Senate elections coupled with political marches, the US exit from Afghanistan and subsequent geopolitical tensions, and the FATF’s retention of Pakistan on the Grey List. Delays in approval of the IMF review and its stringent conditions made it hard to enforce growth inducing policies, while an exceptional rally in international commodities injured the external account position and raised red flags over Consumer Price Index readings. Added to these factors was the reclassification from Morgan Stanley Capital Index Emerging to Frontier Market, causing sharp foreign selling. The dampening effect of the third and fourth waves of the novel coronavirus contributed to the volatility of the market.

However, the market is expected to witness an inflection point next year with the index expected to generate a total return of 25 percent and reach 55,000 points by December 2022. Proactive measures undertaken by the incumbent government and the State Bank of Pakistan to avoid another boom and bust cycle and ensure economic growth remains sustainable in upcoming years, should keep demand cushioned. AHL’s projected GDP growth is set at 5.17 percent during FY22 against 3.94 percent last year. Clarity on the economic front coupled with cheap market valuations and profitability prospects of the stocks is likely to rejuvenate the investors’ interest, while a raft of positive macro-economic developments are likely to emerge once the full impact of macro-economic policies starts to kick in.

Earnings growth is expected at 12.4 percent during Calendar Year (CY) 2022. The jump in corporate profitability is expected to be broad-based with contributions expected from all sectors, including Banks, Electricity & Power, Cement, Automobile Assemblers, Textiles, Technology and Oil Marketing. Moreover, with inflation expected in single digits from the second half of CY22 owing to the high base of last year, currency stabilisation, monetary easing and slowdown in global commodity prices, team AHL projects the quantum of the Current Account deficit to decrease. Therefore, with interest rates to have almost peaked out, investors are likely to rotate money into the stock market in a quest for higher yields, which will provide opportunities for more companies to get listed on the exchange in 2022.

It was also highlighted that although there could be some friction created by the opposition, the continuity of the government is not under threat and that should keep market sentiment afloat. Furthermore, the government’s efforts to comply with the Know Your Customer-Anti-Money Laundering requirements laid down by the FATF also signal a positive outcome in CY22. Furthermore the government’s successful vaccination drive and measures to curb the spread of COVID-19, allowed Pakistan to emerge at the top of the Economist’s World Normalcy Index, given its rapid recovery from the pandemic spillovers. With over 40 percent of the population already vaccinated, we believe risks of another fatal wave and a complete lockdown remain contained. 

Currently, valuations in the bourse are at attractive levels. The KSE-100 Index is trading at a price-to-earnings ratio of 4.9x — a 38 percent discount to the historic average multiple of 8.1x — while trading at a price-to-book ratio of 0.8x — a 53 percent discount to the historic average of 1.7x. Moreover, the index valuations are highly attractive when compared to the region as well, at a 67 percent discount to regional markets against the average historic discount of 38 percent.