Brokerage house AHL expects KSE-100 to provide upside of 24% in FY24

A brokerage house stated on Saturday that KSE-100 is expected to provide a return of 24% in fiscal year 2023-24 as the market celebrates an end to the balance of payments-led economic crisis.

A report from Arif Habib Limited titled ‘Pakistan Strategy FY2024: Resurgence of Optimism’ cited that the index is expected to return to its historic mean multiples.

The KSE-100 index has posted a return of 8.7% (3,615 points) since the staff-level agreement with the International Monetary Fund (IMF) for a new Stand-By Arrangement (SBA).

On Wednesday, the IMF approved $3 billion SBA for Pakistan in its Executive Board meeting as well.

The index has seen some profit-taking to close near the 45,000 level on Friday after inching close to 46,000 earlier in the week.

“We view that the stage has been set for positive market momentum, supported by a combination of SBA with IMF, a downward trajectory of inflation, easing import restrictions by the State Bank of Pakistan (SBP) and adjustments in energy tariffs,” it said.

“We expect the KSE-100 index to post a total return of 24% to 56,013 points by June 2024.”

We expect financial markets to rejoice in the new political setup as elections will bring clarity to the political arena. This will help in taking bold economic decisions that address the structural issues. A new IMF programme is expected to be negotiated as soon as the SBA ends: AHL report

If achieved, this will be the all-time high value for the KSE-100 Index.

The report said that the stock market is trading at 2024 PE(x) of 3.7x, indicating a valuation even lower than the trough PE(x) observed during the 2008 financial crisis (3.9x) and a significant discount (38%) compared to the 5-year historical average P/E of 5.9x.

The report remained bullish for oil, banking, cement and energy stocks of listed firms.

‘Govt to introduce structural reforms for next IMF deal’

The report said Pakistan could see its “newly voted-in government” making better economic policy decisions including the “successful negotiation of a new IMF programme.”

“Pakistani politics seems to be highly polarised at the moment. While ruling government parties are not expected to participate in the elections under one platform, a seat adjustment formula cannot be ruled out,” the report said.

“We expect financial markets to rejoice in the new political setup as elections will bring clarity to the political arena. This will help in taking bold economic decisions that address the structural issues. A new IMF programme is expected to be negotiated as soon as the SBA ends. Interest rate cuts are expected in Feb 2024/March 2024.

“In our view, political stability and monetary easing are likely to be the biggest triggers for a sustained rally in the index.”

General elections are set to take place in Pakistan in October or November 2023 after the current government hands over the charge to a caretaker setup.

The report cited that the SBA with IMF holds the potential to attract further inflows from international creditors, thereby bolstering liquidity and strengthening reserves but despite this positive development, Pakistan faces the pressing task of reviving economic recovery and enhancing overall economic performance.

“We believe Pakistan will likely enter another longer-term agreement with the IMF after the elections,” it said.

“Such an agreement would not only provide continued financial support and policy guidance from the IMF but also enhance Pakistan’s credibility and signal its commitment to economic stability and reforms. This, in turn, can help unlock additional financial assistance from other international creditors.”

Major indicators

The report expected Pakistan’s economy to grow at 3.3% in FY24 driven by sectoral growth given the shifts in monetary policy, diminishing of domestic uncertainties and easing of external account pressures.

“The fiscal deficit is likely to remain high despite austerity measures underway as part of the IMF programme. A combination of lower revenues and borrowing costs is likely to keep the fiscal deficit around Rs7.8 trillion (7.6% of GDP), well-above government’s target.”

AHL expected a gradual easing of the import curbs early next year as IMF discouraged import restrictions. The report pointed out that reduction in oil import bill amid lower oil prices would be fully visible in FY24.

However, it stated that the global recession leading to demand suppression will remain a downside risk for exports.

“Pakistan’s current account deficit has significantly reduced due to import restrictions, fiscal policies, and energy consumption measures. However, risks persist as import backlogs, manufacturing sector dependencies, and post-flood reconstruction needs could widen the deficit.”

The report further added that external sector pressures are expected to ease-off and the State Bank of Pakistan (SBP) reserves are projected to hit $10.6 billion by FY24.

It also underlined that consumer price index (CPI) will average around 21% in FY24, monetary easing to start by 2HFY24.