Brokerage house Topline expects KSE-100 to reach 52,000 points by end of FY23

Brokerage house Topline Securities has said that it expects the benchmark index of the Pakistan Stock Exchange (PSX), the KSE-100, will reach 52,000 points by the end of this fiscal year.

In its ‘Pakistan Market Outlook - Mid Year Strategy 2022’ on Monday, Topline predicted that the domestic equity market is poised to post a strong recovery after clear signs of economic stabilization.

On Friday (August 5), the KSE-100 rose 670.87 points or 1.62% to close at 42,096.24 points.

"We believe that the worst is almost over as tough economic measures have been taken in the last few months," it said. "Market is likely to post a return of 25% in next 12 months, where we expect KSE-100 index reaching 52,000 level by June 2023," said the brokerage house in its report.

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Topline said the market is currently trading at an all-time low Price to Earning Ratio (PE) of 3.3x/4.7x (excluding circular debt companies). "This is much lower than the 15-year historic PE of 8x," it said.

It stated that amid current economic challenges and political noise, this low PE will continue in FY23. "However, we anticipate PE to improve to 5.0x (excluding circular that companies), remaining below its historical average payment amid some uncertainty on the economic and political front."

The brokerage house added that the KSE-100's recovery will be mainly led by local liquidity. "We do not expect any major outflows or inflows from foreigners," it said as foreigners' holdings have already come down to $1.3 billion, which is 16% of free float from the peak seen in 2016 with holdings of $8.2 billion dollars (32% of free float).

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Furthermore, Topline was of the view that Pakistan's current account deficit (CAD) is likely to be lower than consensus/market estimate for FY23. "We estimate CAD of $8.7 billion (2.3% of GDP) in FY23 lower than State Bank of Pakistan (SBP) latest estimate of $10 billion."

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On currency parity, the brokerage house expects Pak Rupee to strengthen after falling by Rs48 or 21% in 2022 to date against US dollar.

"We expect Pak Rupee to range between Rs200-240 during FY23 where on average basis it is likely to settle at around Rs220 vs average of Rs178 in FY22."

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Moreover, inflation is expected to remain close to SBP's revised estimate of 18%-20% in FY23. "However, we expect YoY CPI to start falling from Sep 2022 as inflation will likely peak in Aug 2022.

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"Due to this, we think interest rates are near their peak where we see policy rate coming down from 15% to 13.5% by June 2023 and 9.5% by June 2024," it added.

On Pakistan's funding needs, a key cause for concern, Topline said that the gap for FY23 is now estimated at $32.2 billion including debt repayment of $23.5 billion, which is much lower than earlier estimates due to lower than expected current account.

"Resultantly, roll over risk will reduce especially for US$1bn of Eurobond and US$4bn of commercial loan in FY23 as reliance on commercial borrowing may not be needed due to lower than expected current account deficit.

"With almost all conditions of the International Monetary Fund (IMF) having been met, its $1.2 billion tranche will be released after board approval which is expected by August end. This IMF endorsement will also help Pakistan in getting other inflows and rolling over Bi-lateral and Multi-lateral loans."

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