Overview: Investor confidence dented by political challenges
Question mark hovers over implementation of political reforms.
KARACHI:
The government began its journey on an upbeat note in 2013, but persisting political challenges seem to have damaged investors’ sentiments for now.
While the government remains adamant that an economic turnaround is indeed under way, many investors are now raising concerns about policymakers’ ability to carry out politically challenging reforms. This is what KASB Securities found out in its recent meetings with the managers of foreign funds that invest solely in emerging and frontier markets.
In a note issued to its investors, the Karachi-based brokerage said foreign investors are now raising questions about the planned power tariff hike, reduced transmission and distribution losses, privatisation of state-owned enterprises, broadening of the revenue base and cooperation of opposition parties in the passage of IMF-mandated bills.
“Despite a few glitches, we see continued government commitment on the reform agenda and believe the International Monetary Fund (IMF) programme will broadly remain on track,” it said on an optimistic note, adding that the government was in compliance with the IMF’s qualitative and quantitative targets up to June.
The IMF has also said Pakistan’s economic reforms were on track and that its executive board will meet in December for approval of two loan tranches totalling $1.1 billion.
“We sense investors are more cautiously optimistic on Pakistan’s investment case, as the recent events have disrupted an otherwise smooth sailing,” it said.
The other side of the story
But are investors taking into account the benefits of a substantial drop in global oil prices? It appears that the 20% drop in oil price since the start of the fiscal year has not been fully appreciated by investors, KASB Securities believes.
Noting that up to 35% electricity generation is based on fuel oil, it said the decrease in oil prices has obviated the need to raise power tariff at least in the near term. Decreased oil prices, if sustained through the year, can potentially shave off Pakistan’s 2014-15 import bill by up to 10% from the estimated $16.6 billion.
Having delivered stellar returns of a cumulative 166% since December 2011, KASB Securities says the performance of the Pakistan equity market will now be more dependent on earnings growth and yields.
As for stock valuations, Pakistan is still the cheapest market among major Asian markets, like China, Hong Kong, Taiwan, South Korea, Malaysia, Singapore, Thailand, Indonesia, Philippines and India. Pakistan’s estimated price-to-earnings (P/E) multiple for 2015 is the lowest (7.5) among the 11 major Asian economies.
The return on equity offered by the Pakistan equity market is still the highest (22%) among the 11 major Asian economies. With an expected dividend yield of 6.8%, the Pakistan market also offers the best yield for 2015, according to KASB Securities estimates.
“We reiterate our liking for cements, banks, exploration and production, power and select names in fertilizer,” it added.
Published in The Express Tribune, October 14th, 2014.
The government began its journey on an upbeat note in 2013, but persisting political challenges seem to have damaged investors’ sentiments for now.
While the government remains adamant that an economic turnaround is indeed under way, many investors are now raising concerns about policymakers’ ability to carry out politically challenging reforms. This is what KASB Securities found out in its recent meetings with the managers of foreign funds that invest solely in emerging and frontier markets.
In a note issued to its investors, the Karachi-based brokerage said foreign investors are now raising questions about the planned power tariff hike, reduced transmission and distribution losses, privatisation of state-owned enterprises, broadening of the revenue base and cooperation of opposition parties in the passage of IMF-mandated bills.
“Despite a few glitches, we see continued government commitment on the reform agenda and believe the International Monetary Fund (IMF) programme will broadly remain on track,” it said on an optimistic note, adding that the government was in compliance with the IMF’s qualitative and quantitative targets up to June.
The IMF has also said Pakistan’s economic reforms were on track and that its executive board will meet in December for approval of two loan tranches totalling $1.1 billion.
“We sense investors are more cautiously optimistic on Pakistan’s investment case, as the recent events have disrupted an otherwise smooth sailing,” it said.
The other side of the story
But are investors taking into account the benefits of a substantial drop in global oil prices? It appears that the 20% drop in oil price since the start of the fiscal year has not been fully appreciated by investors, KASB Securities believes.
Noting that up to 35% electricity generation is based on fuel oil, it said the decrease in oil prices has obviated the need to raise power tariff at least in the near term. Decreased oil prices, if sustained through the year, can potentially shave off Pakistan’s 2014-15 import bill by up to 10% from the estimated $16.6 billion.
Having delivered stellar returns of a cumulative 166% since December 2011, KASB Securities says the performance of the Pakistan equity market will now be more dependent on earnings growth and yields.
As for stock valuations, Pakistan is still the cheapest market among major Asian markets, like China, Hong Kong, Taiwan, South Korea, Malaysia, Singapore, Thailand, Indonesia, Philippines and India. Pakistan’s estimated price-to-earnings (P/E) multiple for 2015 is the lowest (7.5) among the 11 major Asian economies.
The return on equity offered by the Pakistan equity market is still the highest (22%) among the 11 major Asian economies. With an expected dividend yield of 6.8%, the Pakistan market also offers the best yield for 2015, according to KASB Securities estimates.
“We reiterate our liking for cements, banks, exploration and production, power and select names in fertilizer,” it added.
Published in The Express Tribune, October 14th, 2014.