Brokerage forecasts 31pc upside for stocks in 2024 on improved fundamentals

KARACHI: Stock market is likely to continue its recovery in 2024, driven by a smooth transfer of power to a new government after elections, a new long-term funding program from the International Monetary Fund (IMF) and an expected fall in interest rates, a brokerage report said on Saturday

Topline Securities said the benchmark KSE-100 total return index would reach 75,000 points by December 2024, a potential upside of 31 percent from the current level of 57,000 points.

"Pakistan market is currently trading at PE (price-to-earnings ratio) of 3.1x based on 2024 estimated earnings. This is far lower than last 5 year and 10 year average PE of 6x and 8x respectively. This is even lower than countries that have defaulted like Ghana and Sri Lanka," the report said.

The report attributed the low valuation to the external account vulnerabilities that Pakistan faced in the past two years, when its foreign exchange reserves fell below two months of import cover, affecting the Pakistani rupee and investor sentiment.

The report said that the situation would improve in 2024, as the new government would sign a new and bigger IMF program to address the balance of payments crisis.

“Elections in February 2024 will provide the much needed political stability,” the report said. “Based on initial assessment, chances are high that PML-N and its coalition partners get the highest number of seats in the election.”

The report added that Pakistan’s external account vulnerabilities could only be addressed effectively through a new and bigger IMF program, which it expected the new government to sign in 2024. “Resultantly, we estimate some stability in PKR, which we expect to average Rs302 in 2024 versus Rs280 in 2023 and may reach Rs324 by December 2024,” the report said.

The brokerage also expected that the State Bank of Pakistan (SBP) would cut its policy rate by 7 percent in 2024 to reach 15 percent by December 2024, compared to 22 percent now, as the economy stabilizes and inflation eases.

The lower interest rates would boost the cyclical sectors such as cement and steel, which would also benefit from better volumetric sales. The report also liked banks due to their unmatched valuation.

The report also highlighted the strong growth in corporate earnings in Pakistan, despite the economic challenges. “In the last five years (FY19-23), average profit growth of KSE-100 index companies has remained remarkable, growing at 18 percent a year,” the report said.