KARACHI:
The benchmark KSE-100 index of the Pakistan Stock Exchange (PSX) is forecast to jump around 30% over the next 13 months to a record high of 75,000 in December 2024, signaling that share prices of the top 100 companies will rise to new highs.
In its comprehensive report titled “Stock market recovery has just begun – Index likely to reach 75k in 2024”, Topline Research cited “smooth transfer of power to the new government after the elections, new long-term financing program from the IMF and expected interest rate decline will be key drivers for equities in 2024”.
The index jumped a net 44%, or 15,750 points, in the past four-and-a-half months to hit an all-time high of 57,751 on Nov. 16 after the IMF’s $3 billion loan program was awarded and a successful first appraisal.
The research house said a major factor that would provide liquidity to stocks was the expected fall in the policy rate. “With clear signs of economic stabilization, we expect the State Bank of Pakistan (SBP) policy rate to decrease by 7% in 2024 and reach 15% by December 2024.”
Elections in February 2024 will also provide much-needed political stability. “Based on the initial estimate, the chances are high that the PML-N and its coalition partners will get the largest number of seats in the elections.”
Pakistan’s external account vulnerabilities can only be effectively addressed through a new and larger IMF program, it said. “We expect the new government to sign this long-term program with the IMF in 2024. Therefore, we estimate some stability in the PKR, which we expect to average Rs 302 to a dollar in 2024 against Rs 280 in 2023 and may to reach Rs 324 by December 2024.”
The research house said cyclical sectors including cement and steel will lead the future rally due to expected policy rate cut and better volumetric sales. He also expects banks to play an active role in the rally.
The KSE-100 index is currently at an all-time high due to huge dividend payouts. However, the share prices of most of the listed companies are still well below their 2017 highs.
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Topline argued that prevailing share prices still remain low on the long-term earnings (PE) chart, although the ratio surpassed the previous record high set six years ago.
Currently, the shares are priced at an average forward PE multiple of 3.1, meaning they are priced at 3.1 times their respective earnings per share (EPS).
The average forward PE multiple of the last five and 10 years was 6 and 8. This strongly suggests that there is a lot of room for potential upside in share prices, taking the index to 75,000 points next year.
“The KSE-100 index target for 2024 is based on the targeted forward PE of 3.5 multiples. This is based on the average PE of the last two years, when Pakistan’s foreign exchange reserves fell below two months of import coverage, affecting PKR (rupee-dollar parity) and investor sentiment,” Topline said.
Corporate profits are growing at a rapid pace despite economic vulnerabilities. Over the past five years (FY19-23), the average earnings growth of KSE-100 companies has remained remarkable at 18% per annum.
In addition, recent increases in electricity and natural gas prices will help control the cyclical accumulation of debt that has been affecting the earnings and cash flows of listed energy-related companies.
“Our conservative PE target of 3.5x reflects that Pakistan’s external financing risk will remain despite IMF support and we may not see an upgrade to the historical long-term average PE of 8x. At best, the KSE-100 may cross 75k if the market reverts to its mean.”
Despite the recent stock market recovery, Pakistan continues to trade at a deep discount to regional indices. Pakistan is now at a 68% discount to the MSCI EM PE of 13.4 times and at a 56% discount to the MSCI FM PE of 9.8 times.
Published in The Express Tribune, November 19u2023.
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