Despite the continued recovery, the KSE-100 index is trading at a steep discount of 56.6 percent as compared to the historical average of 35 percent in the region.
The equity market is certainly poised for further re-rating and improving risk perception with regards to the investment climate, consolidation of a democratic setup, concerted effort against internal security issues, comfortable balance of payments position, continuation of monetary easing and access to liquidity with re-introduction of a leverage product on cards, Farrukh H. Khan, CEO of BMA Capital, said this in his in-depth analysis of the budget 2009-10 here on Monday.
He said that the FY09 was a best challenging year for the KSE-100 index and after witnessing a low of 4,815 points and PER of 4.2X on January 09 the market has gradually recovered to the 7000 index level and a PER of 5.8X.
He said that the FY10 is the year of living cautiously. Pakistan faces considerable stress on its security complex which is crowding out spending in other sectors. The high cost of capital is vexing the economy, making resource mobilisation and tax base expansion difficult.
He was of the view that dependence remains predominantly on foreign public sources for capital. Fiscal policy may be looking towards growth but the walk remains skewed towards protecting macro-economic stability; controlling inflation and sustaining currency. The thrust of fiscal policy is towards the industrial sector. Cements, cars and communication have been provided concessions, duties on pharmaceuticals, tractors and raw materials have been rationalised and industry is being given protection through higher import duty. Broad focus remains on energy and agriculture, he added.
An expansive PSDP programme of Rs 626 billion will help to stimulate the economy while non-materialisation of foreign inflows remains a key risk to growth. Slippage with regards to revenue targets could put pressure on the projected fiscal deficit of 4.9 percent. The agriculture sector has been the focus in this budget with large allocations for water resource development, tractor schemes and productivity enhancement, he added.
Spending on construction in conjunction with an accommodative monetary stance should help revive manufacturing. However, imposition of FED on services, increase in WHT on imports and carbon surcharge have the potential to re-initiate inflationary pressures. In this regard, increases in the price for crude oil will be critical in determining the macro pressures. Though recovery since October 08 has been remarkable, persisting structural weaknesses threaten to derail future growth, he added.
He said that the KSE-100 is still lagging behind, trading at an unprecedented discount of 56.6 percent to the region. With a democratically elected government in place, insurgency in the north being quelled, reserves sitting above $11.0 billion and aid flowing in from, equity markets are revving up. Valuations are cheap and amidst a loosening monetary policy will look better with each subsequent rate cut.
"Fundamentals will remain key to KSE performance; we expect earnings growth for FY10E and FY11E to clock in at 8 percent and 15 percent respectively, which implies room for re-rating towards a PER of 6.8x-7.0x and an implied target level of 8,400-8,700", he said.