Macro Analysis /

Pakistan Market Survey: KSE-100 can turn corner by Q4; positive rates surprises could bring forward timeline

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Intermarket Securities
    12 July 2019
    • Our survey of more than 40 local institutional investors has most market participants eyeing range-bound Index performance across the next few months, before the KSE-100 turns the corner in 4Q 19 to close the year north of 35,000pts. Importantly, almost a quarter of respondents believe the Index can cross 40,000pts by year-end, up 18% from current levels. 
    • The FATF’s decision, due in Oct’19, is not considered a risk, with all but one respondent ruling out blacklisting. After 13% depreciation of the PKR vs. the US$ in 1H 19, survey respondents believe that further depreciation in 2H 19 will be a more modest 3-6%. However, the policy rate is expected to rise by another 125bps on average before peaking at 13.5%.
    • The expectation for further interest rate hikes comes despite a 650bps increase already in this cycle, and the last CPI reading at c 9% (core inflation is lower at about 7%). In our view, if interest rates depict a positive surprise in the July MPS (50bps increase or lower), market participants could potentially bring forward their timeline of when a rally begins i.e. to within 3Q 19.

    Expectations point to a year-end rally 

    The KSE-100 shed 9% in 1H 19 (21% in US$ terms), and the downtrend has continued in July with the last close at 33,875pts. Survey respondents expect the Index to trade in a tight band this quarter (30,000-35,000pts), with no one expecting a break below 30,000pts. Expectations are more bullish for 4Q 2019, with almost 70% of respondents expecting a close of above 35,000pts for Dec’19. A sizeable c 25% of our sample believes the year will close with the Index above 40,000pts. This seems to suggest belief that macroeconomic concerns and risks to earnings outlook have largely been priced in already. The KSE-100 closed in the red in each of 2017 and 2018; if it closes 2019 above 37,000pts, it will break this trend (three consecutive negative years were last seen in 1994-1996). 

    Foreign buying is expected to accelerate

    Net FPI inflows clocked in at US$48mn in 1H 19, with buying in Banks and Cements more than offsetting large selling in Oil & Gas Exploration. Our survey respondents expect this run rate to potentially accelerate across 2H 19, with more than 60% expecting net FPI inflow of more than US$100mn across the full-year. There is less conviction on whether there will be a funds flow from the domestic property sector into the stock market (despite the FY20 Federal Budget dis-incentivizing property trading). Earnings growth expectations may also have to be tempered, in our view, with almost a third of respondents expecting more than 10%yoy growth next year. This adjustment may take place following the upcoming 2QCY19 results, where sectors such as Cements, Steel and Autos may sharply disappoint. 

    Interest rates hold the key 

    Despite Pakistan missing FATF deadlines so far, and the jarring tone of the FATF statement in June, almost all survey respondents believe that Pakistan will not be blacklisted (final decision due in Oct’19). The PKR is also expected to depreciate by a more modest 3-6% in 2H 19 (following the 13% depreciation in 1H 19).In contrast however, interest rate expectations remain relatively hawkish - on average, respondents expect a 125bps increase in the policy rate to 13.5% (the mode is split between 13.0% and 14.0%). This is despite a 650bps increase in interest rates already in this cycle, the last CPI reading at c 9% (vs. street consensus of more than 9.5%),and the SBP Governor recently communicating that there is a qualitative improvement in the inflation outlook given that the government  will no longer borrow from the central bank. Within this backdrop, we believe a positive surprise on interest rates (e.g. a 50bps or lower increase in the July MPS) can potentially bring forward the timeline of when a rally begins.

    Risks: (i) FATF blacklisting, (ii) weaker than expected earnings growth, (iii) foreigners turning sellers 

    Upside risks: (i) Positive surprise on interest rates