Pakistan Strategy: Market Valuation - Where is the bottom?
- The increased noise on politics and growing risks to macro stability has brought discussion on likely justified market valuation in the limelight with valuation in 1998 and 2008 being used as most readily available reference points for market bottom.
- However, we contend there are stark differences in both 1998/2008 vs 2018, which leads us to believe past valuations may not fully serve the purpose.
- Bottom valuations in 1998/2008 reflected by and large distress in market, brought about by foreign investors’ attempt to exit the market dodged by significantly below- average liquidity on both occasions. Foreign investors have sold cumulatively USD1.2bn (5-7% of free float) in past three years with Insurance & MF absorbing the selling.
- On macro side, projected GDP growth and inflation are quite respectable. Moreover, index composition whereby 58% weight in 2018 relates to stocks/sectors which are either devaluation friendly/insensitive. Backdrop for oil prices also supports earnings.
- For us, the bottom of the market is defined at ~7.0x which is a -1 Std. deviation move below average from 2002. This suggests index level of ~37,000! EPS growth and Jun’18 D/Y will likely adjust up the index bottom (KSE-100 is a total return index).
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