In the short to medium term, the market is expected to be highly sensitive to geopolitical developments after the OBL incident, the future of US Pakistan strategic relationship and continuation of financial assistance from the US. In addition the law and order situation and future of the IMF program would also set the market direction in months to come.
Despite expectation of continuation of a flood surcharge in the next fiscal year, we remain positive on the equity market on grounds of strong corporate earnings, improved liquidity in the economy and attractive valuations, a JS research report indicates. Pakistan market is trading at the cheapest PE multiples in comparison to its regional peers. The KSE-100 index is trading at 2012F PE of 6.6x, and offers a steep discount of 48 percent compared to the regional peers. Also, in comparison to the regional frontier markets , it is at 44 percent discount.
Implementation of 15 percent flood surcharge (for the last three and a half months of FY11), withdrawal of GST exemptions on selected items and a hike in Special Excise Duty in March 2011 are key revenue generating measures that the government has already taken before the upcoming budget. However, an interesting point to consider would be whether the government decides to continue the flood surcharge.
With growing pressure for an increase in tax revenues and curtailing the budget deficit, the government may decide to extend the levy in the upcoming announcement. Furthermore, based on historical evidence, where the government prolonged this one time tax measure in 1994, it is difficult to completely rule out the same possibility materialising in FY12.
Based on analysis, if continued in the next fiscal year, FY12F corporate earnings growth could erode by six percent inching FY12F PE up to 7.0x compared to current multiple of 6.6x. Furthermore, the potential implementation of wealth tax in the form of GAT or Minimum Asset Tax (MAT) is set to be fundamentally neutral for the equity market as the measure is likely to be implemented as an alternate maximum tax to the income tax where the taxpayer would be liable to pay the higher of the two, research. In our opinion, the purpose is to bring the lightly taxed sectors such as the agriculture into the tax net with limited implications on the manufacturing segment.
The IMF’s much demanded withdrawal of GST exemptions and implementation of VAT would fall neutral for the stock market. Just to recall, in its March 15, 2011 measures, the government withdrew sales tax exemptions on fertiliser, pesticides and tractors as well as initially restricted zero rated facilities on some key export oriented industries. As far as the CGT is concerned, the government is not expected to withdraw the levy, especially when the key focus is to bring in new sectors under the umbrella to broaden the tax base.
