Despite witnessing a heavy fall of 30 per cent in the last three months, the benchmark KSE-100 index is expected to generate a return of 37 per cent in the current fiscal year FY09, analysts believe.
Weakening macro fundamentals, local political impasse and turbulence in the global economy and financial markets have caused Pakistan benchmark KSE-100 index to crash by 30 per cent in local currency terms from its peak level of 14,676.34 points on April 18, 2008, the research team of JS Global Capital Limited in a research report "Pakistan Market Strategy 2008" said.
"Oil-led economic slowdown, record inflation, higher interest rate, depreciating currency, declining foreign exchange reserves, slow down in corporate profits and plummeting property prices have severely affected investors sentiments in Pakistan" the report said.
With the unsettled judiciary issue still at the heart of local political uncertainty, the global credit crunch has added fuel to the fire, it added. "We, however, think that the local stock market has already corrected itself incorporating all the negatives. The macroeconomic picture is not as bleak as it was in late 1990s after the nuclear detonation that resulted in sanctions severely denting the overall economy. Market valuation, however, is getting closer to the post nuclear blast scenario", the report said.
After the current meltdown, Pakistan''s stock market is currently at PE of 7.3x and 6.4x based on FY09F ad FY10F earnings in spite of FY09 and FY10 estimated earnings growth of 10 percent and 14 percent, respectively.
FY09F PE provides and upside of 33 per cent when compared to historic last 15 years average PE of 9.7x. Compared to post nuclear test PE of 6.0x, Pakistan is now close to that level despite the fact that economic conditions are not as worse as they were 10 years back. Further, despite rise in T-bill rate, earning yield of 13.7 per cent has crossed 1-year T-bill rate of 11.8 per cent.
"In regional context, Pakistan is at 35 per cent discount to MSCI emerging market Asia we believe, market has adjusted for all the bad news and is expected to generate 12-month return of 37 per cent (30 percent in US dollar)" the report said.
The recent fall was the largest in which investors lost 30 per cent in last 64 trading sessions, as the market has fallen in the range of 20 to 35 per cent (average 26 percent) four times in the last six years from 2003 to 2008. In January 2003, market fell by 20 per cent in 25 trading sessions. The March 2005 crisis brought the index down by 34 per cent in 32 trading sessions and in April 2006 index plunged 29 per cent in 41 trading sessions.
"After adjusting for political uncertainties and more than expected worsening of economic indicators, our revised 12-month index target is 14,000 points against 18,000 points given over three months back", the report said.
As tighter monetary conditions have coincided with selling from foreigners, it will take few months before the local market starts to take off. "We have seen similar behaviour after the March 2005 fall when it took four months for the market to absorb the selling and start recovery", it said and added "Our technical analyst also predicts an index range of 10,300-11,800 in next two months".
Lower manufacturing growth, continuing monetary tightening, rising interest rates and slowdown in credit growth are the main reasons which have altered the corporate earnings growth profile going forward, especially those of banks, cements and car assemblers. "Our earning growth has been revised downward for FY09 to 10 per cent from previous estimates of 13 per cent, while a 14 per cent earning growth is expected in FY10. We expect corporate earnings to post an average 3-year (FY09-FY11) growth of 11 per cent, which is lower than historic 3-year (FY05-FY07) average of 19 per cent". The earnings growth is based on 42 JS universe companies constituting 71 per cent of benchmark index.
One contributing factor behind this steep fall in the Pakistan equity market is huge selling from offshore investors, who have sold shares worth $314.204 million in the current year from January 01, 2008 to July 25, 2008, according to the data released by the National Clearing Company of Pakistan Limited (NCCPL) and major outflow of foreign investment was seen in the last three months.
However, despite selling by offshore investors, foreign funds in Pakistan continue to hold around 6.7 per cent of the total market cap (25 per cent in terms of free float) as of July 05, 2008.
With a huge melt down in Asian Emerging Markets, Pakistan market which has been trading at average discount of approximately 30 per cent (with range of 10-45 per cent) in last few years is now 35 per cent below average PE of MSCI Emerging Market Asia, the report said.