Two major factors - the foreign flows and political developments - will remain market movers in 2012 while volumes to remain dull, analysts said. The investors in Pakistan equities will keenly follow the foreign flows and political developments in next year, they added.
"After a negative return of 8 percent ($12 percent) in 2011 till December 16, we expect Pakistan equity market to post a modest recovery with benchmark KSE-100 Index reaching 13,000 in 2012, thereby providing 18 percent ($12 percent) estimated gains (inclusive of dividend yield)", Muhammad Sohail, leading analyst in his research report "Investment Strategy 2012," said.
Currently Pakistan trade close to 3-year low valuation with PE of 5.1x (5.8x with OGDC) with dividend yield of 11 percent (9 percent with OGDC) which is close to T-Bill yield. "We expect Energy and Fertiliser stocks will continue to perform in 2012 due to strong fundamentals while few banks to perform once process of economic recovery kicks in," he said.
In spite of Pakistan being relatively resilient from fragile condition of the West, it cannot remain completely immune. With volumes plummeting to 10-year low to Rs 3.6 billion ($42 million) a day, the net selling of $118 million remained the major reason of market fall as local investors remained shy amid various political issues being faced by the PPP government.
The activity of foreign funds that still hold $2.4 billion (29 percent of free float) will remain the major catalyst for equity market in 2012. "Thus we believe that prolonged global economic crisis, economic slowdown in Pakistan and strained Pak-US relations will force risk-averse foreign fund managers to trim their exposure at least in the first half of 2012, thus keeping Pakistan market to trade at discount to its historical average PE of 8.0x," he said.
And especially with Pakistan performing relatively better than regional markets in 2011, causing its discount to reduce from other markets may also compel offshore fund managers to offload their position, he added. "With PPP government engulfed in multiple crisis like NRO, memo scandal, etc there are strong speculation of election before the schedule time of the first quarter of 2013," he said.
In line with historical trend the market may rally before the election and can reach our 13,000 target earlier than expected, he added. Similarly, the role of US administration after recent strikes by Nato would be crucial and hence dictate future Pak-US strategy.
The US, being the largest investor in Pakistan, has its implications on the overall economy and stock market valuations. And it is likely that Pak-US relationship with the new government will improve thereby causing investors to remain optimistic.