KARACHI – The local bourse is likely to observe a relatively dull period in April-June11, as budget expectations and fears have started to engulf the investors’ minds.
Khurrum Shehzad at Investcapital stated in his analysis that from a medium-to-long term perspective, KSE-100 still offers a better deal on pay/receive scale with huge discounts of 60 percent amongst world peers. He establishes that the Pakistan benchmark equity index, KSE-100, has almost always provided an excellent return opportunity for investors.
The cash dividend yield that is, cash receipts offered by the local bourse against one’s investments (excluding capital gains) has always been highest amongst world key indices. In the last decade, Pakistan equities have provided the highest ever dividend yield of 12.5 percent in 2008, when the stock market fell sharply post floor removal.
The last 10-year average of the local bourse stood at 7.6 percent against world indices’ average of a meager 2.9 percent. He stated that this history leads to a couple of key questions regarding a lack of growth opportunities in Pakistan’s equities resulting in high payouts or political and economic risks have always been greater in Pakistan than other countries, which restricted equities to perform to their stretch or justified Price Earnings (PE).
Pakistan’s changing demographics with over 50 percent of the population comprising of teenagers, rising urbanisation and huge room for infrastructure development etc, are sufficient merits for growth of the economy. Therefore, the growth factor may have hurt market’s earnings multiple to an extent in the short-to-medium term, resulting in higher dividend yield (as the economy has significantly slowed down in terms of real GDP growth from 8.9 percent in 2005 to less than 1.25 percent in 2009, while payout ratio declined from 60 percent in 2005 to 53 percent in 2010).
A smaller decline in payout ratio compared to decline in earnings growth, with risk incorporation into equity prices, might have led to historically higher DY offered by the Pakistan equities. However, other factors related to political and macro economic risks emerged primarily during the last three to four years, coupled with slowed growth, can be held responsible for the low market earnings multiples.
Thus, greater and prolonged political, law and order concerns followed by economic policy issues in Pakistan can be taken as a major factor for the KSE to experience such huge discounts, which should be taken as an opportunity for long-term investments in Pakistan equities, he added.
