KARACHI: The Pakistan Stock Exchange (PSX), the worst performing South Asian market in 2017, is expected to bounce back by 20% next year on the belief that political dust will settle following elections and the economy will enter a high-growth phase.
“Diluting the political noise, commencement of a high economic growth period, low interest rates and strong domestic liquidity lend further conviction to our healthy outlook for the domestic equity bourse,” Arif Habib Limited Director Research and Business Development Samiullah Tariq said in the Pakistan Investment Strategy 2018 which was released on Tuesday.
The PSX benchmark KSE-100 Index has recovered a little bit in the last couple of sessions to 39,525.75 points at the end of trading on Tuesday. However, it is still 17% down since the start of 2017 and 25% from its peak of 52,876.46 points hit on May 24, 2017.
In the previous year, it had emerged as the best performing South Asian market with a return of 46%.
Projections in the report say the benchmark index will finish 2018 at 47,200 points. Tariq said political uncertainty would come to an end with a new government in office in the second half of next year.
“If we consider the last five elections, the domestic bourse has generated an average of 31% return during the first year of the government. This analysis includes 2008 which generated negative returns of 59% attributable to the global financial crisis,” according to the investment strategy report.
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It was projected that average economic growth would be 6% during fiscal years 2018-20 compared to an average of 4.4% in the last five years.
Moreover, the interest rate is expected to average 6.75% during 2018-20 compared to 8.64% in the previous five years. The low interest rate will keep high the private-sector credit demand.
The upside potential in the market is primarily based on the prevailing attractive valuations as the KSE-100 is trading at a five-year low price-to-earnings ratio of 8.5x and at a 46% discount to its regional peers.
It suggested banks, oil and gas exploration and production companies, auto manufacturers, cement and steel industries would generate most of the expected activity at the PSX in 2018.
Banks will perform on expected uptick in interest rate and promising earnings outlook. The exploration and production sector will perform due to rising oil prices globally and rupee depreciation along with growth in hydrocarbon production in the country.
Apart from these, the auto sector should perform in the wake of government’s favourable policy for the domestic industry and a tightened import regime.
Capacity increase, diversification and pricing power remain key themes for the steel sector while robust demand amid infrastructure expenditure bodes well for the cement sector.
Published in The Express Tribune, December 27h, 2017.
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