High political drama in April
Political disruption and economic challenges combined to offset resilient corporate profitability, resulting in a soft April for the KSE100 (+0.7%; -0.6% in US$). The Index fell ahead of the no confidence vote that ousted Imran Khan’s government, before eking out a short-lived bounce. Turnover improved on trading opportunities and result season recalibration, but foreigners continued to exit. We think equities should track fx reserves in the near-term, with improvement close at hand, but more sustainable performance likely needs greater visibility on politics and reforms.
Watch fx reserves and interest rates
One coalition government to another
Mr. Khan’s government was ousted by a no-confidence vote and PML-N’s Shehbaz Sharif was elected as the new Prime Minister for the National Assembly’s remaining term (until August 2023). Mr. Sharif heads an unwieldy and disparate coalition, but will still be wary of calling early elections given Mr. Khan’s mass popularity has arguably increased. The new government is stuck between the urgent need for economic stabilization and its desire to provide relief against inflation (fuel subsidies still not taken back). Meaningful reforms are likely to be put on hold until the next elections take place.
BoP stability is near
Fx reserves with the SBP are now below US$11bn, down from about US$18bn in December, with the import cover falling towards 1.5 months. The new government has quickly initiated talks with the IMF to rescue the EFF programme, with an IMF mission set to visit in May. Bilateral support may also come through, with PM Sharif in Saudi Arabia, and US$2.5bn commercial debt from China expected to be rolled over shortly. The PKR is finding a foothold and may continue to consolidate. Positives include resilient remittances and rising exports (monthly goods exports crossed US$3bn for the first time), but higher global oil and food prices pose a risk.
Inflation remains a concern
National CPI is currently in the 12-13% range but may cross 15% in the near term if fuel subsidies announced by the previous government are reversed. The SBP increased the Policy Rate by 250bps to 12.25% in early April and guided that monetary tightening was over. Markets are skeptical though, with bond yields again opening up a sizeable gap versus the benchmark rate. A potential second term for Dr. Reza Baqir may help (decision due in early May), but the SBP will still have its work cut out in restoring order to financial markets and more credibility to guidance.
Outlook: Equities can lift in the near-term
Pakistan has suffered from short boom & bust cycles in the recent past and needs structural reforms to escape this trend. This is an unrealistic ask from a government with limited time until its term ends. That said, the market should benefit from the likely continuation of the IMF programme, with the coming fx reserves buildup to help shore up confidence. We think the PKR will consolidate and secondary market yields will come off, which can help lift equities. Corporate profits are strong - the IMS Universe has posted headline earnings growth of 43%yoy / 26%qoq in 1QCY22 - and the cheap valuations, relative to the market’s own history as well as to the region, imply potential for significant alpha in any rally.
Model portfolio retains blend of yield and growth
An equal-weighted portfolio of our top picks was flat in April vs. the 0.7% gain of the KSE100. While we retain our Buy on HBL, we replace it with MLCF in our recommended portfolio. HBL’s high admin costs are preventing its true profit potential from emerging, while MLCF should benefit from a buyback plan that commences in late May. We also replace GATM with EFERT - higher export refinancing rates may hurt Textiles while EFERT’s dividend yield is just too good to ignore. Another name we like but that just misses the top picks cut is BAFL (margin expansion and very attractive valuations).