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Pakistan Strategy -The Resurgence | Set for the home run, (AKD Detailed Report, (Jan 20, 2024)

The Resurgence | Set for the home run

 

Targeting 80,500 levels by Dec’24, we believe unfolding events will likely keep the index movement erratic over CY24, however, multi-year low P/Es alongside indications of improving macros will continue to signal as an aggressive buy throughout. Two major checkpoints in this regard include i) Pakistan’s external funding facilities, particularly the IMF and ii) General Elections in early Feb’24 will largely drive the momentum throughout the year. With regards to monetary policy setup, we believe interest rates will begin to modestly tapering off by 500bps, resulting in, cyclicals and leveraged plays to remain in the limelight. However, an unimproved economic situation and sticky inflation adjustments throughout 2HCY24, contrary to our expectations, will continue to pose downside risks. With current sovereign rates (5-yr PIBs) at 15.4% still imply required equity returns at minimum 20-21%, where-in anything below the 63k levels should entice fresh investments.

 

For this reason, we believe our index target remains achievable, where-thematically, Pakistan’s investment case hinges around three factors, i) the economic reform process being undertaken, ii) monetary easing likely to be initiated in CY24 (AKD estimate: 500bps cut) and iii) undemanding valuations (Universe P/E: 3.4, 3-yr average D/Y: 11%; earnings growth: 10%). Further, flow-based investments as expectations of liquidity seeping through to equities in major investor categories (as was seen in 2HCY23) alongside energy sector valuations catching-up to their historical multiples will continue to remain the mantra, reinstating the sentiment that defined the latter part of the outgoing period. While we are bullish over a broad spectrum, preferred plays include Banks (MEBL, UBL, MCB, BAFL), Power (HUBC), E&Ps (OGDC, MARI), Cyclicals i.e. Cements and Steel (LUCK, MLCF, FCCL, MUGHAL) and Fertilizers (FFC, EFERT, FFBL). 

 

Economy – On the Path to Stabilization: Targeting 80,500 levels, market sentiments will continue riding high amid positive economic undercurrents led by recent caretaker measures. Expected interest rate cuts will likely form the crux for investment case where AKD Research forecasts rate decline by a cumulative 500bps, starting Mar’24.  While our forward-looking CPI estimates indicate a downward trend (average CPI during CY24/25E: 25.3%/11.5%), the rationale for the modest rate decline is primarily attributed to the central bank's effort to curtail the rapid growth in the general money supply (up 76% since CY19) and maintain positive real rates of over 3% throughout the medium term. Notably, Cash in Circulation (CiC) experienced a decrease during the latter half of calendar year 2023, aligning with the implementation of  high policy rate. In summary, we believe that maintaining a moderately tight monetary policy stance is the prudent approach to ensuring positive growth in the formal deposit base, continued external flows (and subsequent currency stability) and curbing any unbudgeted deficit spending by the GoP, as has been observed in the past. Overall, our fiscal deficit estimate currently stands at 7.0%, while external support (Saudi, China, UAE) should fill the external funding gaps easily by end FY24E. Nonetheless, an IMF program continues to be of paramount importance, considering the net funding gap of US$4-5bn over the next 12-month period.

 

Market Strategy – Make Positions for the long haul! Remaining bullish across-the-board, we believe investors will eye progress on care-taker measures/reforms and the easing in the policy rate as a validation of future prospects. From a portfolio allocation perspective, we continue to like Banks (high ROEs, study dividend yields – MEBL, UBL, MCB, BAFL), Oil & Gas (valuations; gas-price rationalizations – OGDC & MARI), OMCs (resurging economic activity and GCD reforms – PSO & APL), Power (Circular debt resolution; growth avenue – HUBC & NPL) and Fertilizers (Stable dividend yields, improved core earnings – FFC, EFERT and FFBL). Given Pakistan’s monetary easing theme, we also favor select cyclical plays in the cement sector (LUCK, MLCF, and FCCL) and steel sector (MUGHAL) for CY24. These companies, with solid fundamentals and competitive advantages, are poised to remain in the spotlight as potential growth plays moving forward.