Pakistan Market: Jun'13 Review & Outlook

Pakistan Market: Jun'13 Review & Outlook

Partly influenced by the fall in global equities (MSCI FM Index shed 5%MoM) and a degree of profit taking post 15% returns in May'13 alone, the KSE-100 Index shed 4% in Jun'13. Nevertheless, the Pakistan Market has still returned a stellar 24%CYTD and 52% in FY13. While most sectors lost out in Jun'13 (Cements and Telecoms being notable exceptions to the rule), precedence encouragingly points to a rebound in the months ahead. In this regard, over the last 10yrs the KSE-100 Index has without fail managed to gain in the Jul-Sep quarter, with average gains from the Jun low to the following quarter's high standing at a strong 19%. In our view, similar dynamics could play out this quarter as well provided the upcoming energy policy does not disappoint, a fresh IMF program is entered in a timely manner and corporate results keep depicting resilience. Our Dec'13 Index target is 23,300 points with preferred plays being PSO, ENGRO, PTC, UBL and DGKC. Political noise and law & order conditions remain the key risk to our call.

Jun'13 Review: Following steep returns in the previous month, the KSE-100 declined by 4% in Jun'13. While the market witnessed significant positives - a generally accepted FY14 Budget, continued monetary easing (DR cut by 50bps to 9%) and a weight gain ahead for Pakistan in the MSCI FM Index among others, investor sentiment was affected by a bearish turn in global equity markets (MSCI World Index down 3.6%MoM) as well as by an escalation in political noise post PM Sharif's announcement that General (retd.) Musharraf will be tried for treason. Jun'13 witnessed net FPI of US$41.8mn with key outperforming sectors being Cements (+7.2%MoM), Telecoms (+1.5%MoM) and Electricity (+0.1%MoM). On the flipside, losers included Chemicals (-7.9%MoM) and Autos (-7.3%MoM).  

The Jul-Sep rebound: While the KSE-100 has shed 4% on a MoM basis, the market's decline from its CYTD high stands at 8%. This could potentially represent an opportunity where precedence encouragingly points to a rebound in the months ahead. In this regard, over the last 10yrs the KSE-100 Index has without fail managed to gain in the Jul-Sep quarter, with average gains from the Jun low to the following quarter's high standing at a strong 19% (range: 3% - 48%). While we remain cognizant of bearish global sentiment in equities, Pakistan's un-stretched valuations (forward P/E: 6.9x according to Bloomberg) coupled with a 34% discount to the MSCI Asia Ex-JP Index leads us to eye further upside. 

Market outlook: Factors that could lead to a market rebound going forward include the upcoming energy policy and consequent execution of plans, a fresh IMF program where a LoI may be submitted shortly and any uptick corporate sector profitability particularly if Index heavyweights Oil & Gas and Banks surprise on the upside. In this regard, our Dec'13 Index target is 23,300 points with preferred plays being PSO, ENGRO, PTC, UBL and DGKC. Political noise and law & order conditions remain the key risk to our call where any escalation in the same may act as a reality check, potentially curbing investor enthusiasm over expected macroeconomic reforms.