BMA Capital Management Limited, a brokerage house has released a report on Pakistan’s Investment Strategy for 2021 and has made some exciting predictions regarding the Pakistan Stock Exchange. BMA Capital says that KSE-100 is likely to touch 55,000 points by December 2021. Here are two main factors that may lead to this result and why they can be trusted:
Highest discount to Emerging Market in a decade:
The report outlines that the KSE-100 currently trades at the highest discount of 65 percent to the MSCI EM index in the last ten years. However, in the last ten years, this discount has averaged nearly 33 percent, and since the re-inclusion of Pakistan into the MSCI EM index, nearly 34 percent.
According to the BMA Capital report, one of the key reasons behind the consistent widening of discounts is the massive selling by foreign investors since the re-inclusion.
Market earnings yield is significantly attractive as compared to bond yields:
The current KSE-100 index forward earnings yield of 14.4 percent looks attractive compared to the long term bond yields of 10.0 percent. (The yield on ten years Pakistan Investment Bonds is 10.01 percent as of December 31, 2020). On average, the spread of E/Y over ten years PIB has averaged at 1.8 percent over the past ten years, but the same is currently over 4.6 percent.
Low-interest rates in the country have opened up valuation upside, making yield on equities considerably interesting compared to fixed income instruments in the country. Prevailing market discounts seem to have peaked and likely to narrow in 2021.
This factor highlighted by BMA Capital is also corroborated by other stock brokers working out of Islamabad and Karachi. One such broker, Sanakhawan Hussain Shah, told ProPakistani that there is a lot of liquidity in the market currently, primarily owing to lower interest rates offered by the conventional saving instruments by commercial banks.
He said, “This means that this extra liquidity will flow to alternate modes of investment. Some of it will go to agriculture, some to real estate, and some definitely to the stock market, which has been seen recently.” He also said that 2021 is all set to be a great year for the stock market in Pakistan.
What to expect and how to capitalize on these expectations?
BMA Capital’s base case index target for the KSE-100 index for December 2021 is 55,000 points, which implies an upside of 26 percent from the last closing.
The report said,
Our target is based on BMA Universe CY21E earnings growth of 13.8 percent, expected D/Y of 6.4 percent and KSE-100 index P/E re-rating of 7 percent as compared to MSCI Emerging Markets (MSCI EM) index. KSE-100 index currently trades at a steep discount of almost 65 percent as compared to the MSCI EM index. This discount is the largest percentage in the past 10 years and is way above historical averages. In the past decade, the average discount to MSCI EM was nearly 33 percent which widened further to 34 percent after Pakistan’s re-entry into the MSCI EM index back in June ’17.
In-check pandemic and supportive policy should catalyze price to earning (P/E) retracement to the tune of 6.0 percent, which, along with healthy earnings growth and dividend yield, can drive the KSE-100 index to all-time new highs in 2021.
Investors are likely to track index fundamentals more during the first half of CY21. Whereas potential P/E re-rating will occur during the second half of 2021 as the pandemic fades away.
Now coming on how to benefit from these movements in investor sentiment and resultantly in the stock market, BMA Capital has provided a general outline on which stocks to look out for.
The report strongly recommends investors to start placing their post-COVID bets in sectors such as:
- Oil & Gas
- Autos and Chemicals.
Going further into details within these sectors, the report recommended,
- OGDC (PKR 162)
- HUBC (PKR 110)
- FATIMA (PKR 40)
- INDU (PKR 1,587)
- MARI (PKR 1,857)
- ENGRO (PKR 393)
- PSO (PKR 282)
- MLCF (PKR 58)
- FFC (PKR 131)
- NML (PKR 130)
- EPCL (PKR 58)
- LOTCHEM (PKR 19)
- LUCK (PKR 853)
- HBL (PKR 160)
- MEBL (PKR 120)
- HCAR (PKR 388)