NEW DELHI: At an investor meet in Delhi earlier this month, CLSAs widely followed Managing Director and Chief Strategist Christopher Wood surprised one and all, by saying within Asia, he loves the Pakistan stock market more than any other.
Pakistans economy is currently in dire strait, and the government is desperately looking for a bailout. The Pakistani currency has tumbled over 20 per cent year-to-date to over 134 a dollar, while the countrys central bank has raised policy rate by 275 basis points so far this year to 8.5 per cent.
Tough monetary and fiscal measures have hit several sectors of the economy real hard. Exports finance only 40 per cent of imports, and comprise 8.2 per cent of the nations GDP, which experts say, is the lowest in the world.
Yet, the stock market is surprisingly holding up. The KSE100 index of Pakistan Stock Exchange has gained 2 per cent so far this calendar against a 1.2 per cent drop in the BSE100 index in India, as the neighbouring country's balance of payment crisis has made it approach Saudi Arabia and China for bailout. The Imran Khan administration is also in talks with IMF for financing, the 13th time in last 30 years.
Foreign investors seem to liking this market. They now own 10.81 per cent of the total outstanding shares listed on the Pakistan Stock Exchange (PSX), compared with 5.4 per cent at the end of February, data disseminated by the exchange suggests. On a free-float basis, foreign investors hold 31 per cent of all PSX shares now compared with 21 per cent at the end of February.
Growth concern looms
The State Bank of Pakistan (SBP), the countrys central bank, in a September policy review suggested that the monetary and fiscal tightening had affected large-scale manufacturing. The bank raised interest rates by 100 basis points to 8.5 per cent.
The countrys cotton production is projected to miss its FY19 target of 14.4 million bales, with downside implications for agriculture sector growth. The ancillary services sector is expected to miss its FY19 target as well, SBP said.
“Some positive impact is expected from the contribution of exports-led production and higher fertiliser production amidst depleting stocks and better energy availability,” it said.
SBP see FY19 GDP growth at 5 per cent, but economists project it 40-50 basis points lower. The central bank has also raised concerns over rise in value of oil imports and a weak current account deficit.
Between July and October, the country has seen $269.50 million in foreign equity outflows, a monthly SBP noted suggested. Similar to India, Pakistan too is seeing surge in mutual fund flows, with Pakistani MF industry holding assets worth 60,100 crore Panistani rupees as at the end of October.
Like India, Pakistan is also dependent on imports for its energy requirement, CLSA said in its latest Greed & Fear report.
“Most people expect another 4 per cent depreciation in the Pakistani rupee to the 140 level against the dollar and perhaps another 150-200 bps rate hikes, though the magnitude will primarily be influenced by external developments such as the trend in the US dollar and oil price,” it said.
What is holding up Pakistani market?
CLSA said the most attractive feature of the Pakistani market is low valuations and high dividend yields of stocks. The market trades at 6.9 times 2019 earnings forecast based on a universe of 47 stocks and a 2019 dividend yield forecast of 8.2 per cent.
In Pakistan, debt is concentrated mostly at the government level, and not at the private sector level. Consumer loans and SME loans account for only 12 per cent of total bank loans.
While 69 per cent of bank loans are with the corporate sector, it is not leveraged, with corporate debt totalling only 16 per cent of GDP, CLSA points out
“The lack of private sector debt is important, since it means the economy can recover quickly once the current hole in the balance of payments is plugged, as is likely to be the case by a combination,” the global brokerage said.
With calendar 2019 earnings forecast at 22 per cent, following 7 per cent growth anticipated for this year, CLSA believes it makes sense for Asia and emerging markets investors to revisit the Pakistani stock market “where the security situation is not as bad as is being broadcast.”