KARACHI: With just eight sessions remaining to the end of 2015, stock pundits have begun to peer at what lies ahead. Although the year is likely to close with a bare minimum return to equity investors, analysts are looking forward to 2016 with optimism.
“Pakistan’s market could see a rebound in 2016 with its likely inclusion in emerging markets from frontier markets (FM) by MSCI, coupled with improving macros and relatively stable political environment,” said the ‘investment strategy 2016’ paper released by brokerage Topline Securities on Thursday.
Pakistan’s market currently trades at 2016 public equity (PE) of 8.7x, which is at 8.0 per cent discount to MSCI FM PE of 9.5x and at 32pc discount to its Asian peers.
The analysts said the local bourse can potentially re-rate its PE after MSCI upgrades it to 9.0-9.5x in 2016.
“This coupled with cash liquidity with local investors, 14pc earnings growth (ex-oil and banks) and record low interest rates can take KSE-100 Index to 38,000-40,000 points generating 16-22pc in line with last 20 year annual return of 24pc,” the analysts reckoned.
In the above calculation, the WTI oil prices are assumed to remain at average $40/barrel for 2016 and $45/barrel for 2017.
Stock pundits also touch upon the painful issue of foreign net selling of over $300m in 2015.
“Key question is how much more selling can come and how much lower the market can go? Based on our judgment, in worst case, maximum of $400 million foreign selling can hit the market in 2016,” they said.
Pakistan witnessed strong improvement in economic fundamentals during 2015 due to low commodity prices, which led to improved external situation and low inflation. This resulted in interest rate at multi-decade low of 6pc. And there are strong prospects of sustained GDP growth due to improved macroeconomic fundamentals, security situation and upside from China-Pakistan Economic Corridor (CPEC).
Cements could be prime beneficiary of improving local construction activities and low input costs. Banking sector’s low valuations were not fully justified given CPEC led credit growth. Insurance sector was likely to earn due to improvement in underwriting business. Oil marketing companies could benefit from improved cash flows whereas companies might benefit from rising consumer spending and low raw material costs.