KARACHI: Pakistan Stock Exchange reels around 60 percent discount to average Asian emerging markets with PE at five multiples not seen since the infamous mark closure in 2008.
Tables could be turned if situation eases between Pakistan and India, issuance of Euro or Sukkuk bonds and earlier than expected cut in benchmark interest rate, according to a report compiled by Topline Securities under the theme “Seeking value in gloomy market”.
It says after falling 46 percent (64 percent in US$ terms) from its May 2017 peak, Pakistan market now trades close to forward PE of 5x with Dividend yield of 9 percent and price to book of less than 1x. These valuation numbers have not been seen since the infamous market closure in 2008. Resultantly, Pakistan now trades at a 60 percent discount to average Asian emerging markets PE of 13x as compared to last 10 years average discount of 33 percent.
“We think market has overreacted to bad headlines on the economic and political fronts,” the report said.
The report said any kind of political settlement/understanding between the government and opposition parties will help easing political noise and will help market sentiments. Investigation in corporate matters is also affecting businesses confidence. Ease of Pakistan India tension will boost investor’s confidence and may also result in resumption of trade activities, which will be positive for local textile and cement sector.
Successful completion of IMF’s quarterly targets or waivers on revenues front will help avoid mini-budget or additional revenue measures.
Successful Afghan peace talks will strengthen Pak-USA diplomatic relations and may unfreeze coalition support payment and foreign flows. A decent size dollar bond issue by Pakistan government will improve foreign investors’ perception of Pakistan besides increasing the FX reserves. “We believe that falling bond yields in global markets present an ideal opportunity to Pakistan to raise $2 billion to $4 billion.
Pakistan Eurobond yield on its various maturities bond has come down from average of 8.8 percent in Jun 2018 to 6.2 percent now. Positive development on FATF will also improve perception and reduce market risk. Pakistan has to improve its money laundering operations until Oct 2019 when the last set of action plan items will expire.
Issuance of bonds to resolve pending circular debt will improve cash flows of many listed companies in the energy chain. Government has already issued Rs200 billion Islamic bond in Mar-Apr 2019 and planning to resolve this problem by end of 2020.
IMF has also asked government to share resolution of circular debt plan by September 2019. Earlier than expected cut in interest rate will send a positive signal to the local investors who have been shifting their funds to high yielding fixed income securities. This will also reduce cost of doing business for different sectors.
Sharp decline in international oil prices will keep current account deficit and country’s inflation in check. This will result in early recovery of macro indicators.
FX reserves buildup through carry trade in high yielding local currency bonds during the year will strengthen country’s FX position, the report said.