Karachi, January 02, 2023 (PPI-OT): KSE-100 in CY22: down 9% in PKR; 29% in US$
Worst December in four years
Continuing concerns on political clarity, deteriorating macros and elongated talks with the IMF pushed market participants to maintain a sell strategy in Dec-2022. The declining confidence hammered the benchmark KSE-100 Index throughout the month, closing with a negative 4.6% return and marking the worst December in the last four years. This took CY22’s total return to negative 9.4%, marking the worst year for equity returns in five years; while sharp PKR depreciation dragged US$-based KSE100 performance to negative 29%, the worst in fourteen years.
Volumes declined in Dec-2022, sequentially contracting 11%. Key participants this month were Banks (highest net buyers of US$44mn) and Foreigners (highest net sellers of US$34mn), though which broadly reflected the Bank Alfalah (BAFL) buy back transaction of 200mn shares, which was completed during the last two weeks of December 2022, starting from December 14th and coming to a close on December 30th. The transaction quantum was ~PKR6bn (US$27mn). The activity on the buyback front is expected to remain in limelight with Lucky Cement’s buy back (up to 10mn shares) currently in progress, while a sizeable buy back of Engro Corp (up to 70mn shares) awaiting shareholder approval.
Fears in political and macro landscape – a harsh combination
Higher inflation, anticipation of further monetary tightening and concerns on external balance kept fears on deteriorating macroeconomic indicators at peak. Despite obligating debt payments in Dec-2022, market participants have expressed concerns over central bank’s capacity to fulfil upcoming payments. Reported stricter controls on dollar movement through micromanagement in imports and repatriation added to the anxiety. These concerns continued to widen gap between prevailing interbank PKR/US$ and kerb market rate, which is reportedly at ~10%. The same also resulted in lower remittances in Nov-2022.
To add on, prolonged talks with the IMF over Pakistan’s ninth review of the ongoing program further dented market confidence as news reports continued to suggest government’s failure to satisfy the Fund over efforts on the ongoing macro conditions. The recent increase in subsidised loan rates of Export Finance Scheme (EFS) and Long-Term Financing Facility (LTFF), however, did show signs of government’s intent to move ahead with the program and comply with IMF suggestions.
On the other hand, more political noise this month also kept sentiments in the red zone, further pushing away hopes of resolve between the ruling collation government and leading opposition party.
Recommend overweigh on high D/Ys
The depressed valuations across the board continue to provide lucrative opportunity for long-term investors. KSE100 P/E trades at sub 3x P/E for CY23E, which is at ~50% discount to recent average multiples, reflecting negatives being more than priced in to market capitalization. With IMF talks extended post holidays, however, we recommend a wait and watch approach till clarity emerges. Meanwhile, we strongly recommend to tap unparalleled high D/Y opportunities currently at offer, which offer high D/Y plays in the range of 18% – 22%. Our picks from the segment include UBL, BAFL, MCB, POL, FFC and EFERT.