Karachi, JS Research has presented an optimistic outlook for Pakistan's stock market in its 2024 Equity Outlook, suggesting that the benchmark KSE-100 index could reach the much-anticipated 100,000 mark, a significant leap from its end-of-2023 position at 62,451.
According to JS Global, the potential for the Pakistan Stock Exchange (PSX) to achieve a 60% return in 2024 is realistic. This optimism is driven by an anticipated 14% growth in Profit After Tax (PAT) and a 13% dividend yield. For this scenario to unfold, the PSX would need to undergo a re-rating from its current Price-to-Earnings (PE) ratio of 3.3x to 4.7x. This shift would still position the PSX at approximately 30% below its 10-year average PE ratio. The report outlines the likely trajectory of KSE100 if the market does not re-rate and argues why a re-rating is more plausible.
In a contrasting bear-run scenario, where the market prices in dividends partially or entirely, reaching the 100k milestone could take up to four years. This would involve a PE retraction to below 2x, a figure that historically suggested a near-default situation. JS Global, however, notes that such a crisis seems to have been averted for now.
Under a scenario where the market accounts for dividend and PAT growth without re-rating, the 100k target would be achieved in about 3.5 years. This projection assumes flat PAT growth over 2025-26, influenced by lower earnings from banks due to monetary easing and oil sectors.
The lowering of macroeconomic noise and the prospect of monetary easing are also key factors. The signing of an IMF program and expected reduction in inflation have contributed to a quieter macroeconomic environment. JS Research anticipates the first rate cut in March 2024, with rates potentially falling to 18% by June 2024 and 15% by December 2024.
The attraction of earnings yields and dividends is magnified by the prospect of declining interest rates. With a 5% cut in 12-month bill rates and maintaining the current earnings yield spread at 9%, the upside potential exceeds 25%.
Considering 2024 is an election year in Pakistan, market focus remains on the continuation of reforms, regardless of political leadership. The importance of a new IMF program post the current one's completion in the first quarter of 2024 underscores the necessity for any incoming government to adhere to fiscal discipline to attract foreign investments.
In terms of investment strategies, companies demonstrating strong earnings and dividend capabilities, along with ongoing reforms, are likely to be favored. Banks and fertilizers, specifically MEBL, MCB, UBL, EFERT, and FFC, are highlighted as top picks. In the energy sector, OGDC and PSO are expected to generate event-based excitement, with preference for MARI and HUBC. Cement companies are also seen as potential top picks, with preference for MLCF and FCCL based on energy price trends.
Finally, the report identifies the Pakistani Rupee (PKR) as the primary risk factor to this positive outlook. Stability has been achieved recently, but international commodity prices, IMF/foreign flows, or inflation could impact the PKR and, consequently, the equity market.