Pakistan’s equities valuation reaches seven-year low level

KARACHI: Pakistan’s equities have come down to the levels that haven’t been seen for the last seven years and therefore there is need of confidence building measures to help improve the local bourse, top analysts said on Wednesday.

Shahid Ali Habib, chief executive officer of Arif Habib Limited and Samiullah Tariq, director Research told media the KSE 100-share Index has been trading below its 14-year average price-to-earnings (PE) of 9x and is currently offering investors a 2019 PE of 7.6x. These levels have not been since 2011 and Pakistan equities are cheap, they added.

They said 100-share Index of Pakistan Stock Exchange promises good returns, and is projected to rise around 23 percent by December 2019.

A report by the brokerage Arif Habib Limited proposed some measures for economic revival, including broadening of tax base by enhancing documentation of the economy, imposition of tax on agriculture sector and tax recovery from wholesale and retail trade. Habib said the country will be able to discipline itself by going to the International Monetary Fund (IMF) and far-reaching results would be achieved.

The government was asked to reduce losses in state-owned enterprises through reforms and restrict its role in business through divestment. It was asked to provide inputs at competitive prices and improve labour productivity via provision of vocational training to increase value-added exports.

The government was further asked to encourage remittances through formal banking channels, check abuse of Afghan transit trade, renegotiate free trade agreements, control under-invoicing of imports and exports to protect local industry, attract foreign investment in exporting industries via establishment of special economic zones and improve ease of doing business to increase ranking in the World Bank’s index from the current 136.

The brokerage report further said bilateral relations between Pakistan and US have a room for improvement and it seems that the conditions for Pakistan’s entry into the IMF program are contingent upon that.

“Nevertheless, Pakistan’s focus should be to convince IMF on homegrown reforms agenda and reduce external dependence.”

The report said entry into the IMF program will give confidence to all the stakeholders, including other multilateral institutions like Asian Development Bank, World Bank and capital markets to help the government issue sukuk and Eurobonds and attract foreign investment.

The ministry of finance estimates that the cost of borrowing via sukuk and Eurobonds will be reduced by one to 1.5 percentage points if Pakistan enters into an IMF program.

The report said Pakistan’s economy is expected to grow by four percent during the current fiscal year of 2018/19 compared to a 12-year high growth rate of 5.8 percent last fiscal year.

Burgeoning imports and persistently high current account deficit led to an import cover of less than 1.6 months, stressing reserves to a five-year low level of $8.1 billion.

The report said 22 percent rupee depreciation since December 2017 will lead to lower consumer purchasing power and hence, a compression/moderation in domestic consumption is expected.

“We expect the currency depreciation to amplify its effects on the current account deficit as usually the positive bearing comes with a lagged effect,” it said. “Furthermore, we expect additional weakening of the currency going forward, whereby we forecast the PKR/USD to settle at Rs142 by June and by end December it might end up at Rs152.”