Pakistan Stock Exchange’s (PSX) benchmark KSE-100 index is projected to soar around 30% in the next 13 months to a record high at 75,000 points in December 2024, signalling share prices of 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 said “smooth transfer of power to new government after elections, new long-term funding programme from the IMF and expected fall in interest rate will be the key drivers for equities in 2024.”
The index has soared by a net 44%, or 15,750 points, in the past four and a half months and reached the all-time high at 57,751 on November 16 after the IMF awarded a $3 billion loan programme and the successful first review.
The research house said a major factor that would provide liquidity to stocks was the expected fall in policy rate. “With clear signs of economic stabilisation, we expect State Bank of Pakistan’s (SBP) policy rate to fall 7% in 2024 to reach 15% by December 2024.”
Elections in February 2024 will also provide the much-needed political stability. “Based on initial assessment, chances are high that PML-N and its coalition partners will get the highest number of seats in the election.”
Pakistan’s external account vulnerabilities can only be addressed effectively through a new and bigger IMF programme, it said. “We expect that the new government will sign this long-term programme with the IMF in 2024. Resultantly, we estimate some stability in PKR, which we expect to average Rs302 to a dollar in 2024 versus Rs280 in 2023 and may reach Rs324 by December 2024.”
The research house said cyclical sectors including cement and steel would lead the potential future rally due to the expected decline in policy rate and better volumetric sales. It also expected banks to play an active part in the rally.
The KSE-100 index is currently at an all-time high due to huge dividend payments. But share prices of most of the listed firms are still far lower than 2017 highs.
Topline argued that prevailing share prices still remained low on the matrix of forward-looking price-to-earnings (PE) multiple, though the index surpassed the previous record high recorded six years ago.
At present, share prices are hovering on average forward PE multiple of 3.1, meaning prices are 3.1 times of their respective earnings per share (EPS).
Average forward PE multiple of the last five and 10 years was 6 and 8. This strongly suggests there is a big room for the potential rise in share prices, driving the index to 75,000 points next year.
“Our KSE-100 index target for 2024 is based on the targeted forward PE of 3.5 multiples. This is based on last two years’ average PE when Pakistan FX (foreign exchange) reserves fell below two months of import cover affecting PKR (rupee-dollar parity) and investor sentiment,” Topline said.
Corporate earnings are growing at a fast pace despite economic vulnerabilities. In the last five years (FY19-23), average profit growth of KSE-100 companies remained remarkable at 18% a year.
Moreover, recent electricity and gas price increases will help control the circular debt build-up that was affecting the earnings and cash flow of energy-related listed firms.
“Our conservative target PE of 3.5 multiples reflects that Pakistan’s external funding risk will remain despite IMF support and we may not see re-rating to the historical long-term average PE of 8x. In the best case scenario, the KSE-100 index can go beyond 75k if market moves back to its average.”
In spite of the recent stock market recovery, Pakistan continues to trade at a big discount to regional indices. Pakistan is now at a 68% discount to the MSCI EM PE of 13.4 multiples and at 56% discount to the MSCI FM PE of 9.8 multiples.
Published in The Express Tribune, November 19th, 2023.