BMA Capital Management Limited, a brokerage house has released a report onPakistan’s Investment Strategy for 2021 and has made some excitingpredictions regarding the Pakistan Stock Exchange.
BMA Capital says that KSE-100 is likely to touch 55,000 points by December2021. Here are two main factors that may lead to this result and why theycan be trusted:Highest discount to Emerging Market in a decade:
The report outlines that the KSE-100 currently trades at the highestdiscount 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, andsince the re-inclusion of Pakistan into the MSCI EM index, nearly 34percent.
According to the BMA Capital report, one of the key reasons behind theconsistent widening of discounts is the massive selling by foreigninvestors since the re-inclusion.*Market earnings yield is significantly attractive as compared to bondyields:*
The current KSE-100 index forward earnings yield of 14.4 percent looksattractive compared to the long term bond yields of 10.0 percent. (Theyield on ten years Pakistan Investment Bonds is 10.01 percent as ofDecember 31, 2020). On average, the spread of E/Y over ten years PIB hasaveraged at 1.8 percent over the past ten years, but the same is currentlyover 4.6 percent.
Low-interest rates in the country have opened up valuation upside, makingyield on equities considerably interesting compared to fixed incomeinstruments in the country. Prevailing market discounts seem to have peakedand likely to narrow in 2021.
This factor highlighted by BMA Capital is also corroborated by other stockbrokers working out of Islamabad and Karachi. One such broker, SanakhawanHussain Shah, told ProPakistani that there is a lot of liquidity in themarket currently, primarily owing to lower interest rates offered by theconventional saving instruments by commercial banks.
He said, “This means that this extra liquidity will flow to alternate modesof investment. Some of it will go to agriculture, some to real estate, andsome definitely to the stock market, which has been seen recently.” He alsosaid that 2021 is all set to be a great year for the stock market inPakistan.What to expect and how to capitalize on these expectations?
BMA Capital’s base case index target for the KSE-100 index for December2021 is 55,000 points, which implies an upside of 26 percent from the lastclosing.
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 ascompared to MSCI Emerging Markets (MSCI EM) index. KSE-100 index currentlytrades at a steep discount of almost 65 percent as compared to the MSCI EMindex. This discount is the largest percentage in the past 10 years and isway above historical averages. In the past decade, the average discount toMSCI EM was nearly 33 percent which widened further to 34 percent afterPakistan’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 healthyearnings growth and dividend yield, can drive the KSE-100 index to all-timenew highs in 2021.
Investors are likely to track index fundamentals more during the first halfof CY21. Whereas potential P/E re-rating will occur during the second halfof 2021 as the pandemic fades away.
Now coming on how to benefit from these movements in investor sentiment andresultantly in the stock market, BMA Capital has provided a general outlineon which stocks to look out for.
The report strongly recommends investors to start placing their post-COVIDbets in sectors such as:
– Bank – Oil & Gas – Cement – Fertilizer – Food – Autos and Chemicals.
Going further into details within these sectors, the report recommended,
1. OGDC (PKR 162) 2. HUBC (PKR 110) 3. FATIMA (PKR 40) 4. INDU (PKR 1,587) 5. MARI (PKR 1,857) 6. ENGRO (PKR 393) 7. PSO (PKR 282) 8. MLCF (PKR 58) 9. FFC (PKR 131) 10. NML (PKR 130) 11. EPCL (PKR 58) 12. LOTCHEM (PKR 19) 13. LUCK (PKR 853) 14. HBL (PKR 160) 15. MEBL (PKR 120) 16. HCAR (PKR 388)
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