We recently returned from our US Marketing roadshow held alongside an Asia Pacific Investment Conference. Our impression after meeting largely US based institutions as well as institutions attending the conference is that Pakistan’s theme remains influenced by near-term political outlook as well as risks to the external account. Scheduled IMF repayments and trade imbalances have led the PkR/US$ parity to depreciate by 10% in FY12TD. That said, net CYTD FIPI has clocked in at US$48mn (ex-HUBC settlement) and the outlook for further FPI inflows appears encouraging considering several funds have launched or are in the process of launching emerging/frontier markets funds while some funds hitherto focused on India are now eyeing Pakistan with interest. Note that India faces pressures underpinned by subsidy monetization (fiscal deficit forecasted at 5.1% of GDP for FY13F) and currency depreciation (down 22% vs. US$ in FY12) where impasse in policy response has led to a slowdown in capital account inflows. Moreover, fund managers’ perception of Pakistan’s above-line management quality, undemanding valuations and ease of access will likely stand between any risks of a broader sell-off. In our view, responses from foreign institutions are encouraging for inflow outlook and can only help generate support for Pakistan’s upgrade to the MSCI Emerging Markets Index. Areas of interest for foreign fund managers include: 1) politics, especially the outlook for US-Pakistan relations and potential for early elections, 2) downward pressure on the PkR amidst declining FX reserves and 3) continued strong corporate profitability, disconnected from GDP growth. While macro risks remain, we believe Pakistan (2013F P/E: 5.95x) remains highly attractive for bottom-up investors. We retain a thematic preference for Banks (top picks: UBL & BAFL) and Fertilizers (top pick: FATIMA) in addition to selective preference across sectors (see table).
FIPI and the Market: Foreign institutions own an estimated 28% of free-float market capitalization at the KSE with CYTD net FIPI clocking in at US$48mn (ex-HUBC settlement). Pakistan’s standalone dynamics (relatively weak correlation to world markets) ensure that even as the KSE-100 has slipped 6.4% since recent peak, CYTD gains of 21% are much better than returns generated by regional peers. This diversification benefit may lead to further FPI inflows considering 1) several funds have launched or are in the process of launching emerging/frontier markets products and 2) ease of access to the Pakistan Market is better relative to several regional peers (e.g. India/Bangladesh). These factors could potentially dovetail into Pakistan’s upgrade to the MSCI Emerging Markets Index. .
The broader picture: Domestic politics attracts attention particularly as to when elections may be held. Within the context of the external accounts’ position however, most foreign fund managers are keeping a close watch on US-Pakistan relations where the outcome of the ongoing NATO supply routes issue could lead to a fresh round of inflows (e.g. release of ~US$3bn in suspended CSF). That said, consensus appears to be building for Pakistan’s return to an IMF program in FY13, and this may already be reflecting in market valuations. While we see limited market impact with the recent turn of events on the political landscape, we believe volumes will limit price discovery on either side where uncertainty surrounds election of new Prime Minister who could again face Apex court pressures to request reopening of Swiss cases or calls for early General Elections. Within this backdrop, ratification of parliamentary approvals given after 26th April 2012, inclusive of the Federal Budget 2013, may keep market volumes thin (Budget unlikely to be affected however, considering practical considerations and to avoid disharmony).
The macro-corporate disconnect: AKD Universe profits are up a robust 31%YoY in 1QCY12 and corporate results are consistently beating estimates over the last 4 quarters. In this regard, FII’s are cognizant of a disconnect between listed corporate profitability and GDP growth where a large informal economy (35%-50% of the economy) is reflecting in corporate profits. Outlook for strong corporate profitability is likely to keep foreign fund managers engaged in the Pakistan over the long haul particularly as general consensus is that Pakistani companies are some of the best managed in the region. While our conviction call list for the road show is shown on the previous page, in terms of measuring interest, FII’s were keen to take a closer look at Banks particularly UBL, Fertilizers particularly FATIMA and EFOODS from among consumers stocks. Broader interest will likely be visible as foreign institutions move towards launching small and medium cap Emerging and Frontier Market funds.
No comments:
Post a Comment