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
I applaud! Thats a story well told! Too the point and presented with logic :) In your future writings consider touching upon the 2008 market crash and the variables that played a part in bringing the market to its knees, such as foreign investor pull out, leverage(badla),an over-valued P/ E etc. Overall, you have done a great job.
ReplyDeleteAgreed!
DeleteThank you Fareeha for your feedback, as this was my first attempt at writing a blog. Your comments are valuable and considered for future purposes.
DeleteI can see a clear conflict in this report. First the writer claimed that due to single digit inflation figure and deteriorating discount rates the market is booming up. Next, the writer himself seems to be confused on these fundamentals.
ReplyDeleteMoreover, I would like to ask, whether KSE is a place for long-term or short-term equity holders?
You are referring KSE-100 index as a whole, what about individual scripts? These scripts are still undervalued relative to the era when KSE-100 index first broke its record of 16,000 points before 2008. If the prices of these scripts are not increasing then what is the leading factor in the market? What about FPI? Its so apparent that FPI has been declined. Is KSE depicting true macro economic fundamentals?
KSE is technically strong or fundamentally strong? I agree that the few big market leaders may lead the market up to the level of 20,000 as every body in the market is talking about this level these days but where's the logic laid down. What's the exact reason of this market boom? Not fundamental variables of course.
See what's happening in reality. The price of real estate are climbing up so as the market too. The problem lies here. When there is no work people has to invest their idol money either in real estate or in the stock market.
Please make a review of your blog by considering these factors.
Appreciated anyways.
Thank you Mr. Ehsaan for your feedback. I will just like to respond to some of the points you highlighted:
Delete1) This isn't a report, its an opinion of mine that I shared with some people.
2) Rising inflation figures doesn't mean that the stock market will not perform in fact inflation will be adjusted over this year and it will be a gradual process.
3) I would say KSE is a place for short to medium term investors, since the market moves in cycles, Since the crash of 2008 the market has performed really well except for 2011.
4) I did not want to talk about individual scripts in my blog, I wanted to discuss the general market index as a whole only.
5) Frankly speaking, KSE is a sentiment driven market and looking at 2013, we shall see volatile movements in the index.
6) If your referring to the 2012 market boom, I have written down the facts for its happening. And if your referring to 2013, well yes fundamentals do have an impact since no body is a psychic here.
7) Another reason why the stock exchange will prosper is because looking at other available instruments to invest in currently, i.e bank deposits, floating rate TFCs, T-Bills, they don't really offer attractive yields. Real estate is an illiquid market and will always remain as such, so the only real option left is the stock market and when there is heavy buying from the public we all know what happens than.
I thank you for the feedback once again!
I think the main factor of the boom is also the freedom from IMF restriction in 2011 and paid back there debt payments.
ReplyDeleteDue to freedom from Imf policies they eased there monitory policy as well as fiscal policy. Government spendings were at highest level as elections were approaching.
Now again Pakistan is approaching Imf i think that is the negative point for stock exchange so does is the inflation figures which may draw interest rates up.It will have negative impact on stock exchange
Thank you Mr. Zeeshan for your feedback. I agree with you that one of the main reason for the boom last year has been the IMF decisions.
DeleteInflation figures and Discount rates rising will create a negative impact on the stock exchange but we aren't sure for certain how much these changes will impact the stock exchange. Since last year's return was 49% (Local Currency), this year's return will surely be impacted by rising inflation and discount rates.
Appreciated your efforts!
ReplyDeleteI would like you discuss the case of Lahore Stock Exchange 2000 crises, in which members/Investor manipulated the securities market whereby share prices of selected scips were inflated…….
Thank You Ms. Lubna for your feedback. Unfortunately the LSE 2000 crises was not on my list to discuss in this blog.
DeleteEquity market of Pakistan reflects a lot of promise in Year-2013. Infact, political process in an ecoconmy has a lot to do with the capital market conditions. Unprecedented autonomy of media & judiciary has mended many ways of democratic rule in the country. That is why everybody is hopeful of better governance after the coming elections. Hence, increased political stability would ehance the investort's confidence in Pakistani stocks
ReplyDeleteAgreed Mr. Rafiq, Thanks for the feedback.
Delete