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Karachi, The local equity markets are reflecting heightened confidence as investors anticipate a potential easing in the monetary policy soon, following the Policy Rate being stationed at 22%. With headline inflation projected to drop to 16% by June 2024 and averaging 19% over the coming year, expectations regarding monetary policy adjustments have shifted.
According to JS Securities Limited, the market’s renewed outlook is palpable in the 12M PKRV, which has reduced to a six-month low at 21.7%, marking a 300 basis point dip from its recent peak. This decline implies the market is pricing in a decrease in the Policy Rate. The 12M PKRV’s descent is juxtaposed with the PSX forward earnings yield at 28%, which is approximately 6.5% above the prevailing 12M bond yield of 21.7%.
This anticipation of declining interest rates is also seen as an impetus for a revival in equity market confidence. As earnings yields are expected to decline with a dip in interest rates, this suggests a potential rerating in the equity market’s earnings multiple. Despite the drop in the spread from its high of around 11%, it remains above its historical average of approximately 3.5%.
With the shifting landscape, JS Securities continues to favour high dividend-yielding stocks, emphasizing their benefits in the current environment. Such stocks not only serve as a defense strategy for investors but also present a capital upside opportunity in light of potential monetary easing. This preference is supported by historical data indicating that the 12M PKRV and KSE100 D/Y typically follow similar trends.
Highlighting their conviction in stocks offering strong dividends, JS Securities underscores their backing by robust profits, leading to higher distributions, even if payout ratios remain unchanged. They estimate that their high dividend plays can offer a sustainable dividend yield ranging from 19% to 28%, with an average payout ratio of approximately 60%.
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