Karachi, May 31, 2012 (PPI-OT): Asian stocks have registered their largest monthly drop in more than 3yrs, with the MSCI Asia ex-Japan Index down 8%MoM in May 31’12 on mounting concerns over Europe’s sovereign debt crisis.
According to AKD Securities, in the same timeframe, the KSE-100 Index has shed a contained 0.85% despite volatile US-Pakistan relations, pre-Budget jitters and a global risk-off environment. During the last 3m, the KSE’s discount to the MSCI Asia Ex-Japan Index has sharply declined to 34% – with recent CGT reforms acting as the catalyst, strong corporate results have finally started to get priced in through multiples’ expansion. In this regard, although the Pakistan Market has witnessed bearish sentiment of late, AKD Securities continues to believe that domestic factors will take precedence over global developments. As such, Pakistan’s discount to the region could conceivably continue to compress although risks emanate from politics, US-Pakistan relations and the external account (the Pars/US$ parity has slipped by 3%MoM).
May’12 Review: The KSE-100 Index has shed 0.85%TD in May’12, easily outperforming the region. Average daily volumes registered at 214.5mn shares in the outgoing month. Key developments included loud pre-Budget noise (-vet for Banks; +vet for Cements), priority to the power sector at the expense of domestic fertilizers, ambivalent US-Pakistan relations and a weaker PkRs/US$ parity. Top performing sectors were Fixed Line Telecoms (+20%MoM on potential ICH formation and increase in LDI ASR) and Textiles (+10%MoM) while Banks and Oil and Gas, both down 3%MoM, dragged the Index lower.
A Narrowing Discount: The KSE-100 Index’s discount to the MSCI Asia Ex-Japan Index has sharply compressed to 34%. In this regard, CGT reforms have acted as the catalyst to ‘normal’ political noise, improvement in law and order (frequency of terrorism incidents at 3yr low according to Pak Institute of Peace Studies) and robust corporate profitability (AKD Universe profit growth up 31%YoY in 1QCY12). AKD Securities believes domestic factors will likely take precedence over global developments which could conceivably lead to further expansion in Pakistan’s valuations (FY13 P/E: 6.05, D/Y: 9.31%) vs. The region. Banks may lead a sustained 2HCY12 rally provided pre-Budget concerns fail to materialize.
Key Risks: Primarily external account pressures – thin macroeconomic margins are evident from 3%MoM slippage in the PkR/US$ parity, with pressures intensifying post the SBP Governor’s statements outlining concerns. However, US-Pakistan relations remain a significant swing factor – positive outcome to Nato supply routes issue could lead to release of CSF backlog (-US$2.0bn) and potentially a IMF LoC leading to fresh disbursements by other multilaterals. In the event external inflows fail to materialize, AKD Securities concurs that a formal IMF program may become inevitable by mid-2013.