Karachi, March 28, 2022 (PPI-OT): Muted PSX return overshadows star performers

After delivering 70% return in the preceding 12 months from COVID low in Mar-2020 to Mar-2021, subsequent 12 months up to Mar-2022 have seen KSE-100 trade in a narrow band of 6k points (~13%). Muted PSX return has however overshadowed star performers of last 12 months.

We run a filter on stock wise total returns of current KSE-100 and KSE-30 constituents, to list stocks that delivered returns in excess of cost of equity (6% equity risk premium over 12M average PKRV of 9%). Based on current weights the 15%+ return stocks make up 32% of KSE-100 (23/100) and 36% of KSE-30 (8/30) indices.

The screening suggests that picking winners has not been straight forward. While dividend yields helped stock returns, they were not enough in isolation. Similarly, returns within same sectors were also dispersed, requiring further precise cherry picking.

Looking ahead, a broad-based rally requires macro clarity. Political noise is likely to hit fever pitch this week but clarity is expected to emerge soon. The political clarity, feeding into macro clarity, is going to be key to the elusive broad-based market rally.

Two years since COVID low – two contrasting years since

The KSE100 Index’s last meaningful rally was witnessed post COVID lockdown scenario when opening up of the economy and packages announced by the government and SBP boosted economic activity, reviving investor confidence. The benchmark index rose by ~70% from ~27,200 on 25th Mar-2020, reaching to over 45,700 by Mar-2021. In the last one year however, the Index has been trading in a narrow band of 6,000 points (~13%), reporting a negative performance of 5% YoY, over economic and political uncertainties.

Dull headline numbers overshadowed the star performers

Dull headline numbers have overshadowed some star performers of the last 12 months. We run a filter on stock-wise total returns of KSE-100 and KSE-30 constituents, to list down stocks that have delivered returns in excess of cost of equity (i.e. a 6% equity risk premium over 12M average PKRV of 9% during the same period). The breakdown of stocks falling within different return ranges is presented alongside and depicts cherry picking has been rewarded. Based on current weights the 15%+ return stocks make up to 32% of KSE-100 (23/100) and 36% of KSE-30 (8/30) indices.

Cherry picking however has not been simple

High dividend yields help but are not enough in isolation

Of the 8 stocks in KSE-30 that met the 15% return benchmark, 6 stocks (EFERT, EPCL, FFC, UBL, MARI and MTL) delivered double digit dividend yields. However, growth stories have also been amply rewarded as visible with SYS and MEBL. It is also interesting to note that yields in isolation have not delivered outperformance where a number of notable yield plays (POL, ENGRO, HUBC and MCB) fell short of the 15% total return mark.

Stock performances within sectors have also deviated

Returns have not been similar within the same sector, requiring further precise cherry picking. Tech stocks are a case in point with two stocks making it in both the top 10 and bottom 5 of KSE-30. Banks within KSE-30 also depict a wide return range from -6% to +39% (the range expands to -16% to +59% if all banks in KSE100 are included). There are some broad-based results too, where most domestic demand / cyclical plays feature in lower half of the table, while three of the bottom 5 performers are Refineries. Urea producers on the other hand delivered more consistent positive performance.

Expanding the analysis to KSE100 – some notable differences

Expanding the analysis to outperformers among KSE100 constituents, the broader insights remain relatively the same with the 23 outperformers boasting of seven banks, three fertilizer, two chemicals, two autos and one oil and tech play each. Notable difference vs KSE-30 however is textile and real estate / hospitality (both not represented in KSE-30) and a couple of names with stock specific stories but their weight in the index remains small.

Looking ahead – broad based rally requires macro clarity

While investors are likely to continue the search for alpha plays in the immediate future, a broad based rally like the one seen in Mar-2020 to Mar-2021 requires political and macro clarity for market participants. Political noise is expected to hit fever pitch this week but clarity should emerge one way or the other. The political clarity feeding into macro clarity is going to be key to market fortunes and return of broad-based investor sentiment, especially with negotiations with IMF underway and increasing pressures from international commodity prices. We reiterate our liking for banks, E and Ps and fertilizer where a combination of growth stories with dividend yields are on offer and continue to be solid bets till clarity emerges.