Market observers in Pakistan tend to warn international investors of staying away from the local equity market amid increasing uncertainties about the global economic outlook on the back of renewed fears of a double-dip recession and debt crisis originating, respectively, from the United States and Europe.
Further, analysts see foreign inflows, interest rate trends and strained Pak-US relations as key triggers for major changes in equity valuations in the next few months.
“In this atmosphere, we foresee foreign investors to remain risk-averse,” said analysts at Topline Research. Revisiting their take on the role of foreign participation in the domestic stock market, the analysts noted with concern that foreign investors, on net basis, had sold stocks worth $80 million during last three months. “With this in perceptive, coupled with strained Pak-US relationship, we are revising our 2011 index downward from 14,000 to 12,800,” the researchers said.
Robust earnings growth
The analysts, however, still believe that robust earnings growth of 24 per cent and 15 per cent in 2011E and 2012F might provide an ideal opportunity for long-term investors. At current levels, they said, the equity market in Pakistan was trading at an attractive forward PE multiple of 5.4x (ex OGDC), the lowest since the equity market collapsed in early 2009. “Our index calculation is based on 20 per cent discount to last 10-year average PE of 8.0x (ex-OGDC), as we think this discount justifies bad governance, higher interest rate, economic slowdown and resurgence in global crisis,” the analysts said. Focusing high-dividend yielding stocks, analysts said, with earnings growth as a major index driver, energy, fertiliser and banking sectors’ stock were likely to lead the rally in the rest of 2011. “We expect the energy sector to post profit growth of 16 per cent in 2012E as consistent power shortage will render into higher reliance on IPPs, whereas volumetric growth will spur earning improvement in E&P companies,” they viewed. Also, higher urea prices would amount to record profitability for the fertiliser sector (up 34 per cent in 2011E). About banking, market observers said the sector was expected to show double-digit earning growth on the back of higher net interest margins (NIMs).
Major index drivers
Observers also said the flow of portfolio investment, interest rate trends and the ongoing strain in Pak-US relations would be the major index drivers for the rest of 2011. “The major index driver for remaining 2011 would be the activity of foreign portfolio investors which is a function of trends in global markets,” they added. The timing and quantum of interest rate cut would also effect equity valuations in coming few months, they said, adding that Pak-US relationship would also have a bearing on the index, which had come under considerable strain since the Abbottabad incident.