Thanks to resilient corporate earnings and sharp interest rate cut of 400bps in last 15 months, Pakistan market is trading at attractive one year forward earnings yield of 16 percent which is far higher than 1-year T-bill which is close to 10 percent, analysts said. With compelling valuations, few defensive stocks are offering higher yields than the government securities, they added.
"Despite KSE 100 index at record high, market earnings yield is attractive when compared to yields on risk free government securities", Farhan Mahmood, senior analyst at Topline Securities said. This is after the gap of 4 years that market earnings yield is far higher than the benchmark T-bill with market FY13 earnings yield is 16 percent with 1-year T-bill rate close to 10 percent.
Last time following the infamous market crash of 2008 when Index reached at record low of 4800 points, market earnings yield was close to 23-25 percent, he said. However, at that time benchmark T-bill yield was close to 13 percent. Thus, since then the gap between earnings yield and benchmark yield narrowed but thanks to sharp reduction in interest rates recently, market yield is attractive again after 4 years, he added.
Interestingly, KSE 100 index is offering dividend yield of 8 percent which is slightly below current T-bill yield of 9.7 percent. However, it is relatively attractive when compared to last 5 year average dividend yield of 6 percent versus average T-bill rate of 11 percent. "Thus, we believe stocks like HUBCO, POL, FFC, FFBL and FATIMA are offering 12-15 percent dividend yields including few banks like UBL, NBP and BAFL", he said.
"We have set index target of 18,000 by May 2013 up to elections", he said. Pakistan stocks are available at attractive PE of 6.3x on FY13 and 5.5x on FY14 profits compared to last 10 and 20 years average PE of 8.2x and 10.2x, respectively.
"With corporate earnings likely to grow by 17 percent in FY13, more than last 5 year average of 10 percent, we think Energy and Cement stocks to outperform due to strong fundamentals while banks which under-performed market by 7 percent year-to-date will bounce back as the impact of declining interest rate is already priced in", he said.