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Pakistan Strategy

Pakistan Strategy 2012

64 replies to this topic

#1
Amin Khan

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    Global - Pakistan Strategy - The Siegfried Line

    Alphas to call time out
    CY12 has started off on a disappointing note for the KSE100 which has lost 2% in the first trading week of the year. The downturn follows a bleak CY11 when the index closed down 5.6% at 11,348. We believe the dismal performance of the local bourse has been primarily led by foreign selling which stood at USD 117mn and USD 6.7mn during CY11 and the first week of Jan12 respectively. It is our view that the persistent sell off has resulted in depressed market sentiment which has brought the KSE100 to very attractive levels. The market’s performance belies its fundamentals with LTM corporate earnings growth of 28% YoY while the KSE100 is currently trading at a very attractive forward PE multiple of 5.3x against its 5yr average of 7.7x. We further highlight that the KSE100 is trading at a forward PBV multiple of 1.4x, a discount of 20% to its 2yr average of 1.6x.

    Negatives overplayed, sound fundamentals
    We set our year end KSE100 index target at 12,000 which is based on 11% YoY earnings growth in CY12 and translates into an implied PE multiple of 7.4x. We believe that anticipated macroeconomic weaknesses particularly on the external front call for a defensive strategy. With inflation expected to trend above 12% during CY12, we believe equities offer an attractive alternate where a balanced portfolio can result in paramount positioning on the risk/return matrix. We advice investors to remain focused on low beta, high dividend yield stocks while further narrowing their approach from sectors to companies. Liquidity – or lack thereof – continues to be our primary concern over the market where we believe the government will have to agree to regulatory changes in the CGT regime if it wants to restore vibrancy to the country’s capital markets.

    Economy – the Achilles’ heel
    Key challenges to the market’s performance will arise on the economic front where a bleak outlook on external front is expected to lead to further currency devaluation. We believe the same has been responsible for the foreign sell off witnessed lately, along with a heightened level of risk averseness. However, we believe that the market has overplayed negatives and is currently trading at very attractive multiples. Moreover, we highlight that foreign divestment is not limited to Pakistan and regional markets have witnessed similar trends. The important point to glean from that is the recent market performance is not reflective of fundamentals, opening up an opportunity for investors to build up position. That said, we remain conscious of structural weaknesses in the macro-economic scenario which we believe we have aptly accounted for by assigning a lower forward multiple. Similarly, we believe that we hot not yet seen the last of foreign divestment and downside risk from the same remains intact. We further highlight any progress on US-Pak relationship, the much awaited letter of comfort from the IMF and any regulatory changes to the CGT regime as key triggers for the market.

    The Asian star
    Pakistan continues to be the cheapest regional market trading at a leading PE and PBV multiple of 5.3x and 1.4x respectively which translates into a discount of 34% for PE and 9% for PBv against the MSCI FM. Moreover, Pakistan offers the highest dividend yield of 8.05%, against the region’s average of 3.8%.
    (GLOBAL)
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    #2
    Amin Khan

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    Strategy for Pakistan Equities 2012

    Attractive valuations with IFs & BUTs!!
    We recommend a cherry picking strategy in Pakistan on strong fundamentals and immunity to economic fluctuations. The market continues to trade at attractive multiples (PE: 6.0x for 2012) and is expected to give a total return of 18.6 % inclusive of 8.0% in terms of cash dividends. Key reasons for our above view are as follows:
    • The KSE-100 index closed at 11,347 points depicting a drop of 5.61% (USD: 9.7%) in 2011. The volumes at KSE mostly remained dried up taking average daily volume to 78.75 mn shares, down 35% as compared to last year. The market activity dropped significantly during the last quarter of CY11 taking the average daily volume to 59.39 mn shares.
    • In 2012, macro economic situation continues to remain bleak especially on currency and interest rates. The inflation is also expected to hover between 13.0 to 13.5% and consequently the policy makers would resort to raising the discount rate to 13.5%. The rising interest rates would lower equity valuations and we may see some market correction. We expect the currency to depreciate by 8% in 2012.
    • The flight of foreign capital would also exert pressure on the stock market on the back of exacerbated Euro debt crisis and a weak currency expectation. Another wave of global recession is expected in 2012 which may bring some downturns in the local stock index arising due to global economic slump. The foreign investment recorded to be PKR 207 bn which is 7.7% of the total market capitalization of KSE 100 index and 22% of the free float.
    • The inefficiencies of the PPP led government paved way for Imran Khan’s party Tehrik-e-Insaf to gain popularity among the masses. Early elections in 2012 (if happens) rather than in 2013, would turn out to be a big positive trigger for stock market as the new govt. is expected to focus on improving the economic situation and raise governance standards.
    • Sectors having strong business models and offering attractive dividend yields like Exploration, Power and Fertilizer form very good basis of investment. Buy POL, FFC, and LUCK.
    (AF)
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    #3
    Amin Khan

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    Politicking

    Change is in the air?
    In a strongly worded judgment in the NRO implementation case, the Supreme Court on Jan 10’11 has held the government responsible for failure to follow out the apex court’s directive. The SC directed the brunt of its verdict towards Prime Minister Gilani, stressing that as Chief Executive of the government, the Prime Minister has failed in his duty to uphold the constitution. The SC also held the President and Federal Law Secretary responsible for publicly refusing to follow its orders while the PM and President were further berated for being more loyal to political affiliations than the State and the Constitution.
    However, the SC has shown restraint in taking any action against the government and its officials. The 5-member bench has recommended that the Chief Justice constitute a larger bench while opining six possible ways to move forward with the case. The referral has allowed the government to re-think its stance on the case while thwarting a clash between public institutions that would’ve been imminent had the SC’s order outlined actions rather than recommendations.

    Politics to dictate sentiment
    Following the announcement of the verdict, the market lost 269 points to touch its intra-day low of 10,771. However, as we have outlined before, the restraint shown by the SC buoyed the market which was able to recover 162 points to close at 10,993. We believe that political uncertainty will continue to dampen market sentiment where news flows from Islamabad on Jan 16’11 – the date earmarked for the larger bench to take up proceedings – will be closely watched.

    The end game as we see it
    In our view, the PPP led coalition will opt to implement changes in the Prime Minister House and ask for more time to implement the Court’s verdict on the NRO. A few more heads in the bureaucracy may also roll while we believe that status quo will be maintained in the Presidency for the time being. The President enjoys immunity under the Constitution and while the topic remains controversial, the SC is yet to take a stance on it. In such a scenario, we see early elections in Sep-Oct12 a likely possibility.

    The KSE & change
    A look at KSE and regime changes in Pakistan indicates that market has historically been receptive to a change at the top. Figure 1 in the attachment indicates that market’s performance has been bullish following the frequent changes in the government during the 1990’s. During 2000-10, the political landscape in Pakistan remained fairly stable and the market maintained its bullish trend post elections in Mar08.
    (Global)
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    #4
    Amin Khan

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    Pakistan Strategy 2012 By FS

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    #5
    Amin Khan

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    Pakistan Monthly Snapshot : KSE: New Year gift from FM sparks a relief rally in Jan

    KSE: 2012 begins with a ray of hope
    2012 started off positively with KSE-100 +4.6% MoM and volumes +79% MoM to US$35mn/day. Jan started on a, by now familiar, dismal note but the relief on Capital Gains Tax (CGT) announced by the Finance Minister in his mid-month visit to the KSE turned fortunes around. Despite the strong rebound, the KSE could not continue its trend of outperforming the region in Jan and emerged as an average performer. The trend reversal in FPIs too could not tip them into the positive territory, and FPIs came in marginally negative for Jan (-US$0.4mn).

    What does the CGT relief package include?
    The Finance Minister stated that the govt. has accepted all SECP proposals on CGT. These include 1) no questions on source of funds invested in the stock market till Jun-14; 2) freezing of CGT rates at current levels; 3) abolishing withholding tax on sale transactions; and 4) centralized collection and calculation of CGT (shielding individual investors from hassle of paperwork and interaction with tax authorities). In addition, SECP also notified relaxation in MTS rules to revive leverage. SECP allowed 1) individuals to act as financiers and 2) mix of cash and securities as margins compared to cash only margins earlier.

    Politics had however grabbed headlines before CGT relief
    Prior to the CGT relief, Memogate and the NRO case had dominated the limelight. The NRO case ebbed and flowed in terms of momentum, where the case led to a contempt of court notice to the Prime Minister, while the contempt hearing turned into a case to determine the immunity or otherwise of the President. Memogate however lost some steam towards the end of Jan with 1) Mansoor Ijaz, a US citizen at the heart of the controversy, refusing to visit Pakistan and 2) PM issuing a reconciliatory statement and lowering tensions with the armed forces.

    Spread out results season to keep market interested...
    The timing of the CGT relief coincided with onset of results and provided impetus. Dec results season usually lasts longer (cos following calendar year have additional time to announce results). Hence stock specific activity should also last longer, with semi annual / annual payouts in Dec providing added fodder. For the energy sector, progress on proposed TFC to ease circular debt could be critical.

    ... but CGT SRO, IMF and Monetary Policy hold the key
    However, critical for the broader market would be 1) issue of the SRO which formalizes the Minister's announcement whereas a delay could play on nerves; 2) Monetary Policy due on 11th Feb. Sentiments continue to fluctuate between the over limit govt borrowing and softer inflation readings (we maintain our status quo call); 3) IMF report, akin to a report card on macros, which will drive chances of a Letter of Comfort and hence disbursement of committed sovereign flows.
    (KASB)
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    #6
    Amin Khan

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    IMF and Moody's outlook on Pakistan macro

    Recent comments by IMF and Moody's on Pakistan macro landscape highlight the urgent need to strengthen macro and financial stability via reforms.

    Key takeaways from IMF's statement on conclusion of Article IV Consultation on Feb 3 include: (1) exchange rate flexibility required to contain external risks; and (2) tighter monetary policy if inflationary pressures rise further.

    This could dampen market optimism on 1) IMF report proving a potential catalyst to unlocking sovereign flows; and 2) MPS where benign inflation readings in Dec/Jan had fanned hopes of a potential cut in policy rate on Feb 11.

    We reiterate our stance of status quo on DR where (1) govt breaching its own commitment of net zero quarterly borrowing limit; and (2) continued liquidity injections having inflationary implications likely to weaken the case for easing.
    (KASB)
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