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Karachi: A Year Of Defensive Play
KSE exhibiting resilience
CY11 has been one of the worst years for the global equity markets as growing concern of US economic recession, EU debt crisis and slowdown in major developing economies has taken toll on the markets.
According to Arif Habib Limited, On average, major equity regional indices dropped by more than 20% (approximately) in CY11. Besides the global economic turmoil, local bourses had to endure foreign selling pressure, domestic economic turbulence, law & order situation, political uncertainty and strained Pak-US relations. Despite the above mentioned challenges, KSE remained one of the best performing market in the region as its benchmark KSE100 Index, shed by 5.6% to 11,347.66 levels.
CY12 Outlook: A year of defensive play
CY12 is bound to start with uncertainty as foreign outflows which were around USD 111mn in 4QCY11 are poised to continue as downturn in Pak-US relations and stalled economic growth with growing energy crisis play themselves out. FBR’s acceptance of the demand to change the collection methodology of CGT to presumptive tax regime (PTR) could provide the market much needed impetus and depth in the form of rising turnover which plummeted to a mere 79mn in CY11. Additionally, any prolonged political uncertainty would further aggravate economic slowdown consequently effecting market sentiment.
If CY12 ends up being an election year it could provide market with a much needed boost, as historically market sentiment has remained positive during such periods. In CY12, Arif Habib Limited expects earnings (Arif Habib Limited’s universe) growth to be around 8.5% compared to CY11 anticipated growth of 20%. The banking sector could act as a spoiler in this regard since squeezing spreads on account of decline in interest rate may restrain their earnings growth to single digit.
Index is targeted at 12,600 by CY12 end
Based on expected earnings growth of 8.5% YoY in CY12, Arif Habib Limited’s benchmark index (KSE100) works out to 12,600 for CY12, translating to a return of 11%. The market is currently trading at CY12 PE of 5.5x and offering Dividend yield of 8.2%. Arif Habib Limited’s top picks for CY12 are HUBC, KAPCO, APL, MCB, POL, LUCK, FFC. E&P and IPP companies provide the best hedge against the PKR depreciation. While from the dividend yield perspective, HUBC, KAPCO and POL are likely to steal the show by offering more than 11% yield.
Growth is dependent on industrial performance
A combination of continued energy shortages, weak private investment and deteriorated law and order situation, in Arif Habib Limited’s view are key risks to the country in achieving its targeted growth of 4.2%. In view of these latest developments, Arif Habib Limited has scaled back Arif Habib Limited’s growth projections to 3.8% in FY12 from an earlier 4.1%. Arif Habib Limited believes performance of service and agricultural sectors’ will remain the largest contributor to growth in FY12. Arif Habib Limited expects domestic demand relatively sluggish. Given the tight revenue corridor Arif Habib Limited believes further space for a fiscal stimulus to support private sector investment growth seems unlikely. While supply constraints mainly on the back of energy deficits and flattening global growth.
Policy rate is likely to remain on a hold
Arif Habib Limited estimates that the CPI inflation will likely to firm-up in 2HFY12, owing to non-food prices, exchange rate movements and government borrowings – making it trickier for the SBP to further cut the discount rate.