Pakistan Market Strategy: A New Market High in 2020
Pakistan Market PE to rise to 8.0-8.5x from current 6.5-7.0x
We foresee the KSE-100 Index to reach 55,000pts by the end of CY20, offering an upside of around 35% from current levels. Upside largely stems from KSE-100’s PE re-rating to 8.0-8.5x (from current levels of 6.7x). The last high of the KSE-100 was 52,861 on May 25, 2017.
Lower interest rates and a strong PKR to drive sentiments
Monetary easing: Interest rates are estimated to ease by 125bps during CY20 largely due to easing inflation outlook during the year. Moreover with the GoP’s focus shifting back towards growth, some fiscal loosening will likely be followed by monetary easing. Leveraged plays such as Cements, Steels, and OMCs will likely benefit from reduced financial charges. For Commercial Banks, reduced NIMs due to a low interest rate scenario will likely be offset by gains on investments. Moreover, lower interest rates will likely result in higher flows in equities in 2020.
A strong Pak Rupee: With improving external accounts, the Pak Rupee has started gaining strength, recovering from a low of PKR 165/USD to current levels of PKR 155/USD. Going forward, with added bilateral flows expected, we foresee the Pak Rupee to gain additional grounds during CY20. A stronger rupee bodes well for manufacturers that rely on imported inputs particularly Autos, Steel and Electronics.
Recovery in economic activity: Rising tax collections due to the documentation drive in addition to improving current account has afforded the GoP to shift its focus back towards growth. Consequently, we anticipate recovery in economic activity, a scenario that is expected to benefit most cyclicals particularly Cements, Steels, and OMCs.
Foreign flows to drive the next leg: The recent rally from the index’s lows was primarily supported by domestic investors while foreign investors largely remained on the side-lines. This scenario is evidenced by net foreign outflows of USD18mn since Aug’19. We believe the recent rally will likely improve Pakistan’s weight in the MSCI EM index. Moreover, with KSE-100 still at a 52% discount to the MSCI EM Asian Index, we expect foreign participation to increase during CY20. Materialization of this scenario will bode well for blue-chips, particularly index heavy-weights such as HBL, OGDC, MCB, PPL, ENGRO and UBL.
Sector Picks - Banks and E&Ps to Outperform
Banking Sector - 40% earnings growth anticipated in CY20: With one-off expenses of the sector far behind them, the banking sector is expected to post earnings growth of 40% during CY20. Moreover, many commercial banks have strategically paddled the expected interest rate cycle by investing in long-term PIBs, insulating them from reduced NIMs post the monetary easing. Our top picks include HBL, MCB and MEBL.
Oil & Gas Exploration and Production (E&P) - Trading at significant discount to implied oil price: The E&P sector has been trading at a significant discount to its implied value. Based on our estimates, the sector is trading at an implied value of USD31/bbl, a discount of 52% from international oil price of USD65/bbl. We believe the sector is primed for a rally once the Secondary Public Offering (SPO) overhang concludes.
BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.
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