Pakistani Stock Market : Outlook 2013
The Pakistani stock market, a friend or a foe? I have come across several individuals working in the financial industry of Pakistan and have witnessed various views on our precious stock market. Views ranging from and I quote, "Pakistani stock market is a joke" and on the other side hearing people say "The best way to make an inflation adjusted return is through Pakistani stock markets."
Such sayings makes individuals wonder what drives these beliefs into thinking such things. I for one, am a strong believer in our stock market. What makes me believe this, is no bias for my country and passion, rather facts and figures that generally stand out to prove I might be right. I would like to take this opportunity to bring in one basic statistic about our Pakistani Stock market, Karachi stock exchange 100 in particular ; at the start of 2001, the index level was 1,518 points and as of 31st December 2012 the index closed at 16,905 points. Cumulatively this is a 1,014% return and on average a 31% return annually. Where do you get to see such returns in the whole world ! ? The Pakistani market dubbed a frontier market has really shown its colors when it comes to proving a point. Last year (2012), the Karachi stock exchange broke its highest level crossing the 17,000 points barrier whilst returning 49% on an annual basis. If we take into account the rupee depreciation, on a dollar basis, the stock market achieved a 38% return. The following charts depict the performance for calendar year 2012 for both emerging markets and developed markets in equities:
According to Lipper, fourteen of the best top 100 performing equity funds in 2012 are being managed here in Pakistan. Some of the key reasons for this explosive growth have been as follows:
1) Attractive valuations
2) Relaxation of the capital gains tax regime
3) Monetary easing of 250 bps by the State Bank of Pakistan
4) Materialization of much needed inflows on account of coalition support fund.
Our Pakistani stock market is currently valued at 7 times forward earnings and on average it is offering a dividend yield of 7.5%. Since earnings growth is the prime factor most investors tend to look at and is the integral part of any emerging market's fundamentals, our stock market (KSE 100) is expected to sustain despite higher ratios offered by regional peers. This is where the story really gets interesting on how the Pakistani stock market may rally in 2013. I would now like to share with you some projected fundamentals that will really get you going:
1) Corporate earnings for 2013 are expected to grow by around 16-17% in the next four quarters and we may see the stock market grow with corresponding mulitples.
2) The price to earnings ratio is set to be valued at around 6.6x.
3) An average dividend yield of around 7.5%
4) A return on equity of around 25%
5) An average price to book value of 1.5x
6) A projected real GDP growth of around 3.5%.
Looking at these fundamentals, our market is still at a discount relative to its regional peers and going forward we may still see a surge in the Pakistani stock market performance. With such targeted fundamentals many analysts are looking to target the 20,000 points barrier of Karachi Stock Exchange 100 by year end 2013, this could in fact bring an 18.3% return on an annual basis. However certain political outcomes need to be considered as well, as this is an election year for Pakistan and generally due to political instability leading up to and after the election, the market sentiments do have an impact on the stock market. Going forward we may see inflation figures climbing back into the double digits and the discount rate increasing as well. The rupee may even further depreciate causing exporters in our industry to really profit from this movement. Any rupee depreciation against the US dollar may shift sovereign ratings downwards as a result of economic deterioration which may drag down equities in 2013.
The Morgan Stanley Capital International review of the Pakistani stock market is scheduled for May 2013 and if all goes well, we may see Pakistan being upgraded to emerging market status which would give a physiological boost to our stock market.
If we compare the pros and cons that have been mentioned above, we can clearly assume an optimistic belief about the Pakistani stock market and I for one would not like to rue any missed opportunities that our market still has to offer going into 2013.
Sources:
http://www.arifhabibltd.com/
www.finance.yahoo.com
www.nafafunds.com
www.marketwatch.com
www.scstrade.com
