EUR 4.27 For Business Accounts Only

Interest Rate Prospects, Discount to Peers Justifies Fall in Market’s P/E

After yesterday’s meltdown KSE-100’s leading P/E has fallen to 7.9, which appears to not be too unreasonable when we consider the interest rate scenario and the discount from Emerging and Developed Markets.

The leading P/E is now the lowest since August 2014, at which time 6-month KIBOR was at around 10%. As shown in the chart above, interest rates have been around or have been much above 10% every time KSE-100 has traded at a multiple of 7.9 (please note that the right axis has been reversed to show the strong relationship between interest rates and P/E). This could imply that the market has incorporated a 100bps hike in interest rates ahead of Pakistan’s highly likely entry into a new IMF program. To recall, the Finance Ministry has already stated that it agrees with IMF’s suggestions of further monetary tightening, and the Finance Minister is scheduled to meet with IMF’s staff at Bali later this week to discuss a bailout program.

Taking into account the history of the discount of KSE-100’s P/E from that of Emerging and Developed Markets, PSX does not appear to be much undervalued.