Downward price revision of Pakistan equities likely

Pakistan equity market, interestingly, has yet not seen major correction in spite of recent sell off in global markets.

Lesser share of foreigners, 8% of the market capital and 30% of free float, likely IMF deal and the new government’s energy sector reform plan has kept the share prices from falling drastically.
Though Pakistan being a typical frontier market is not highly correlated with developed and emerging markets trend but some correlation exist.
“We think local shares may see some downward correction,” said the analysts at Topline Securities.
As a result this resistance, they said, Pakistan’s valuation discount to regional market had come down though it still trades at an attractive FY14E PE of 7.5x with dividend yield of 6.0%.
With US economic conditions on the path of improvement coupled with reduced unemployment rate, Federal Reserve in its latest monetary policy meeting said that it can slow down its monthly $85bn asset purchase by the end of 2013.
“As a result, yesterday we saw MSCI World, Emerging Market (EM) and Frontier Market (FM) indices fell by 3.5%, 4.0% and 0.9%, respectively,” said the analysts.
Similar, they said, was the trend in the bond markets as the yield of 10yr US Treasury was up 13bps. Conversely, on the news of economic improvement US dollar strengthened by 1.8% against JPY to 98.25 and by 0.6% versus EURO to 1.32.
Citing international news agencies, the analyst said, Pakistan ranked amongst top 10 in the world in 2012, providing annual return of 49% and 38%, in dollar terms.
This trend has continued in the current year as well, in 2013 till date Pakistan equity market has provided return of 30% (28% in US$ terms), and is placed at sixth position amongst the top 10 equity markets in the world.
According to SBP statistics, foreigners hold close to US$4bn worth of shares in Pakistan market which is 8% of market cap and 30% of free float. Most of foreigners’ holding is concentrated in large cap stocks.
Circular debt has been a constant thorn in the profitability of the whole energy chain. Thus energy sector reforms are something that the govt is very keen to bring in. “We believe successful resolution of circular debt will remove the bottlenecks and spur profitability growth, especially across the energy chain,” said the analysts. However, they said, the method that will be used to resolve the issue still remains a mystery.