Research houses slash stock market growth forecasts

Expect the market to end calendar year at 41,000-42,000 points

KARACHI: Leading brokerage houses have slashed their growth projections for Pakistan Stock Exchange's (PSX) benchmark KSE 100-share Index by a massive 7,000 to 8,000 points, which will reach 41,000-42,000 points by December 2020.

In December 2019, most research houses had anticipated that the index would end 2020 in the range of 49,000 to 51,000 points, considering the stability at that time and expected return of growth to the national economy.

However, these research houses have now revised down their growth estimates following the coronavirus pandemic, which has massively shaken the global economy and stock markets around the world and Pakistan is no exception.

"There is room for reduction in the PSX growth projection by 7,000-8,000 points to around 41,000-42,000 points by the end of December 2020," Topline Securities' Director Research Atif Zafar said while talking to The Express Tribune.

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"The growth in the index will be lower due to the coronavirus pandemic, lockdowns in many countries, a massive drop in international crude oil prices and other commodities, and a likely 200-basis-point cut by the State Bank of Pakistan in the benchmark interest rate (including the 75 basis points cut earlier this week) by December 2020," he said.

Earlier, the brokerage house had expected the index to hit 49,000 points by the end of the current calendar year.

The KSE-100 index plunged over 8,000 points, or over 21%, over the past nine trading sessions to around 30,000 points by Thursday (Mar 19) in response to the virus-led economic mess at world. The drop had wiped out a total Rs1,543 billion from market capitalisation in the nine sessions under question.

The market, however, managed to close in positive territory for the first time in the past five sessions on Friday. The index recovered 537.58 points, or 1.78%, and closed at 30,667.41 points.

"The market has bottomed out," Arif Habib Limited Head of Research Samiullah Tariq said. "The stock market may consolidate around 30,000 points (in the short run)," he said.

The research house, however, also revised down the projected level for the benchmark index for the current year.

"We had anticipated that the PSX benchmark index would grow to 51,000 points by the end of December 2020. The growth may fall short by around 5,000 points," he estimated.

The international oil industry is among the worst-hit sectors by the virus. Benchmark Brent crude has shed half of its value since the beginning of February to stand at around $30 per barrel.

"There will be only oil stocks that will negatively impact the growth in the KSE-100 index. Otherwise, the price-to-earnings ratio of almost all the other sectors has remained unchanged for the year," he said. "Oil stocks have around 18% weightage in the benchmark index."

Zafar added banks' earnings may also slow down in the current year due to a likely aggressive cut in the benchmark interest rate to step up economic activities in the country.

Earlier this week, the central bank revised down its projection for the country's real economic growth to 3% compared to the growth of 3.5% estimated prior to January 2020.

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Sharman Securities' analyst Aftab Awan said in a detailed report, "We are seeing the index will reach 42,000 … by December 2020.

"After adjusting for the recent plunge in international energy prices and higher probability of a sharp policy rate cut in 2020, we revised downwards our earnings estimates," he said.

"Given the fact that oil and banking are the two heavyweight sectors in our Sherman Universe, we now expect corporate earnings to decline by 5% in 2020 (ex-oil earnings growth of 8%) versus our previous growth estimate of 13% (ex-oil 18%)."

Thus, the sharp erosion in oil prices has negative implications for the earnings per share of oil stocks while a steep cut in the interest rate may slightly impact banks' profits. However, the earnings of leveraged companies including cement would improve, he said.

Published in The Express Tribune, March 21^st, 2020.

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