AsiaNet-Pakistan Premier Editorial Content and Press Release Distribution Service
Karachi, January 01, 2014 (PPI-OT): The KSE-100 Index gained 3.9% in Dec’13, bringing full-year CY13 returns to a robust 49.4% (US$ adjusted: 41%).
According to AKD Securities, with sentiments buoyed by the first ever democratic transition in Pakistan’s history, investors shrugged off macro weakness to focus on the cheap valuation multiples, driving the market’s P/E from 6.8x at the start of the year to 8.5x at the end. Foreign investors remained key participants, with net FPI of US$398mn in CY13, bringing the 5yr cumulative net inflow to US$950mn.
The market’s P/E still remains below its 10yr average (9.1x) and could witness continued rerating subject to an improvement in macros and market-specific factors (e.g. increase in float/payouts). The multiplier effect is sizeable – P/E rerating from 8.5 at present to 9.5x could, all else the same, drive the Index to 27,500- 28,000 points next year.
The key risk for this thesis is any shortcoming in the GoP’s execution (e.g. failure to divest stakes in SOE entities, launch 3G auction etc.) which could stem the wave of optimism. At current levels, AKD Securities’ preferred plays for 2014 include a blend of growth (NML, DGKC, FATIMA) and high D/Y (HUBC, KAPCO, UBL).
Winners and losers: Within the main Index heavyweight sectors, key outperformers during CY13 were Cements (+74%YoY on continued strong margins and demand), Textiles (+65%YoY on the EU’s GSP Plus status), Autos (+63%YoY on a weaker JPY) and 4) Fixed Line Telecoms (+62%YoY following the ICH agreement and ahead of the 3G auction).
On the flipside, main laggards were Chemicals (+17%YoY on gas supply uncertainty) and Food Producers (+17%YoY on a slowdown in sales). Index heavyweights Oil and Gas (+41%YoY) and Banks (+46%YoY) performed broadly at par with the overall market. Foreign investors were the key winners this year with net FPI of US$398mn in CY13 far eclipsing the next highest net buy of US$47mn registered by Banks/DFIs. Mutual Funds were the main sellers during the year under review, with a net sell of US$227mn.
Key market drivers: This was a watershed year in Pakistan’s history with the first ever democratic transition in power bringing PML-N into in May’13. Selected milestones of the new government include steps to resolve the circular debt issue, successful lobbying for the EU GSP Plus status and smooth change of command in the Army and Judiciary. At the same time, while macros remained under pressure (e.g. rising CPI leading to policy rate tightening), entry into a new US$6.6bn IMF program served to arrest the PkR’s losses vs. the US$ to 8.3% in CY13, and has sparked optimism about future economic performance. As such, P/E rerating was the key driving force behind market returns in 2013, in contrast to EPS growth which provided the main impetus over the previous three years What can take the P/E higher? The KSE-100 Index has already gained 20% in 1HFY14, at par with projected earnings growth for the AKD Universe in 2014.
With earnings growth ostensibly priced in, the next leg of market movement should be dictated by P/E rerating. In this regard, while the interest rate hike cycle should continue, factors that can drive valuation multiples higher include 1) improvement in macros e.g. GDP growth/import cover, 2) political stability and improvement in law and order, 3) possible increase in market free float in conjunction with the privatization and 4) potential increase in energy chain payouts as circular debt is resolved.
Investment perspective: The multiplier effect of any valuation rerating is sizeable – P/E rerating from 8.5x at present to 9.5x could, all else the drive the Index to 27,500-28,000 points by Jun’14. On the flipside, a drawdown in P/E to 8.0x could take the market lower than 24,000 points.
While AKD Securities sees risk-reward metrics tilted towards the positive, risks such any shortcoming in the GoP’s execution (e.g. failure to divest stakes in SOE entities, launch 3G auction etc.) could stem the wave of optimism and stall further P/E rerating. Within this framework, AKD Securities’ preferred plays for 2014 include a blend of growth (NML, DGKC, FATIMA) and high D/Y (HUBC, KAPCO, UBL).