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Pakistan Stock Market - warming up

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Pakistan Stock Market - warming up

Valuations, pro-growth budget & low fixed interest rate

A A H Soomro, CFA, FRM
Jun 26, 2021
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Pakistan Stock Market - warming up

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Dear Readers,

For those who take interest in Pakistan’s stock market, it’s been a test of nerves. We often hear everyday “points gone up/down” or “tezi(bull)” or “mandi(bearish)”. That’s the life we live - and trust me it’s a wholehearted choice. Some say it’s an addiction. It’s true to a larger extent. You can’t simply ignore it.

Let’s recap what has been happening lately:

  • Pro growth budget: In the outgoing budget, Shaukat Tarin presented his blue prints of growth where is rightly pointing out key challenges in the economy; boom & bust, targeting lower/middle class for incentives, reducing tariff structure to encourage local industries, carrot-ing the banks to lend & focusing on IT- exports. These are the needs we have heard. However, structural reforms such as Education, loss making public entities & energy issues are still pending.

  • Budget incentives: Cheaper cars below 1000cc, zero-rated regime for dairy, zero-rated for IT, setting platform for refineries to invest $10-15b, encourage clean (without collateral) SME lending, low interest loans for Agriculture & start-ups, lower capital gain tax on stock market gain, lower tax on textile products at 12% via Point of Sales machines, ending WHT on banking transactions, simple one-page tax filing for SMEs, concept of self-assessment with third party audit of samples, introducing prize draws for buying via PoS sales, 7.5% WHT on electricity bills of non-filers above Rs 25,000 per month, tax on “on money” cars re-selling, normal tax regime for property & interest income over a certain threshold etc

MSCI’s potential downgrade from Emerging to Frontier Market

This was disappointing but a reality check that if you ignore the economy & capital markets for this long, the prizes are lost. Only 5 years ago investors were excied in 2016 when Pakistan won the Emerging Market title. It’s gone. As a matter of fact, we will be a bigger fish in a smaller pond. It is almost a certainty & thus needs to be priced in. It may increase activity from passive funds but invariably be usurped by the active investors, local & global.

FATF’s keeps Pakistan on the grey-list

For those who were rejoicing on completing 26/27 action points, there is more wait. In fact, the new action points handed over would require almost a year to be completed so the good news (if geopolitical lobbying helps) has been further deferred. Pakistan’s role in US withdrawal from Afghanistan may also have an impact specially when Pakistan is declining military bases for the US in Pakistan.

What should we look out for? IMF & Oil prices

While the government is in no mood to massive increase taxes or electricity rates, IMF has been asking to fix the power sector via the tariff hike. That’s the short, easier & successful model. Knowing Pakistan’s dilly-dally to take tough measures, IMF has a point. However, political realities do not permit this government to take any harsh measure that adds to the inflation woes. Already the purchasing power is drastically cut & with two years away from elections, government has lesser re-election chances if it increases the tariff by Rs 5-6/unit as it will have a cascading effect.

What’s not helping is Oil. The prices are north of $75/barrel and with some analysts predicting short term $80-100 dollars move in 2HCY21, Pakistan is in a fragile position. Our tax targets are contingent upon higher Petroleum Levy - that government is avoiding. Similarly, government didn’t increase the tax on income tax rates either that was demanded by the IMF. Hence, the IMF review is delayed till September. Shaukat Tarin has hinted that IMF is not friendly this time but also says that we will remain in the IMF to find a middle ground.

Having said all that..

  • GDP growth at 5% next year

  • Primary Deficit at 0.6% of GDP

  • Innovative budget moves for documenting cash economic

  • Roshan Digital Accounts to fetch $3b

  • Remittances growth to continue in low-travel scenario

  • Reduced out-ward travel - business & religious - due to low vaccination

  • $1.5b Saudi Oil credit facility is active

  • $4.5b 3 year ITFC Oil & LNG credit line

  • $1b spectrum auction is expected

  • 15% growth in electricity consumption by Industries

  • Cheaper electricity & gas extended for another year

  • Cement growth in double digits - construction boom & SBP Low cost scheme

  • Auto sales are higher: Low interest rate, new models & PkR stability helping

  • Expansion plans: TERF-led, local industry, New Refineries & business optimism

  • Fear of Missing Out (FOMO) to kick in when KSE-100 Index touches 52k

  • SBP’s low interest rate guidance - risk-taking & equity remains preferred class

  • Impeccable valuations of Index-heavy sectors - Banks & Oil & Gas Exploration

  • More IPOs, REITs, enhanced allocations, growing retail investors

Usually, investors wait until coast is clear. By that time the share prices have already shot up. It’s when the weather is cloudy (today?) or you have thunder storm (Covid-19 plunge) that you make the most money as assets are available cheap. It’s not done yet.

To conclude: I KSE-100 Index will touch 65,000 by Jun 22 inshaAllah - here’s why

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