Pakistan Market: Corrections in a cash based market

AKD Daily

Pakistan Market: Corrections in a cash based market

The KSE-100 Index shed 305 points (-1.85%) yesterday, up from an intraday low of -ve 2.54%, but a deep correction nonetheless. This brings the market's fall from the recent intraday high of 17,000 points to 3%. While valuations are still attractive (forward P/E: 7.1x, D/Y: 7.8%), political noise and macroeconomic weakness now appear to be coming to the forefront of investor attention. In this regard, contrary to general consensus, the market has witnessed several corrections even while operating without leverage. Specifically, since 2009 the Pakistan Market has experienced 10 corrections, each lasting 38 days on average and erasing 9% from market capitalization. Going by precedence, if this is indeed the cusp of a correction, the KSE-100 Index could potentially head towards 15,500 points. While we advocate caution in the near-term, we believe strong corporate profitability will soon turn attention to valuations where our Jun'13 Index target is 18,500 points. Our top picks are FATIMA, POL, KAPCO, ENGRO, UBL and PSMC while high D/Y (E&P; Fertilizers) and US$-hedged plays (Power) may outperform in the near-term.           .

The bigger picture: In losing 1.85% yesterday, the KSE-100 Index has now shed 3% so far in CY13. In this regard, although positives such as relatively soft CPI (8.3%YoY in 1HFY13) and release of CSF flows continue to unfold, these appear to have been sidelined by an increase in political uncertainty and greater acceptance that an IMF program (and accompanied adjustments to interest rates and the currency) may be needed in the next 6 months. Political noise could also continue to step up across the next few weeks, with new players on the political chessboard calling for electoral reform as the ruling coalition's 5yr term comes to an end. Together with an absence of positive triggers (result season still a month away), these factors have for now seemingly thwarted attractive valuations (forward P/E: 7.1x, D/Y: 7.8%).                         .

So how much of a correction? Over the last few years, the market has essentially operated free of leverage but has still had its fair share of corrections. Specifically, since 2009 the Pakistan Market has experienced 10 corrections, each lasting 38 days on average and erasing 9% from market capitalization. Going by precedence, if this is indeed the cusp of a correction, the KSE-100 Index could potentially head towards 15,500 points in the near-term. At this point, the market's forward P/E would be 6.7x while D/Y would climb to 8.3%, valuation levels that we believe would once again override broader concerns and drive a fresh rally particularly as results start to trickle in.            .

Investment Perspective: We view any correction in the market as an opportunity to build fresh positions. While we advocate caution in the near-term, we believe strong corporate profitability will soon turn attention to valuations where our Jun'13 Index target is 18,500 points. Our top picks are FATIMA, POL, KAPCO, ENGRO, UBL and PSMC while high D/Y (E&P; Fertilizers) and US$-hedged plays (Power) may outperform in the near-term. Alternatively, 2012 star performers (Textiles and Cements) may bear most of the brunt on the downside.

Pakistan Market: Corrections in a cash based market