Pakistani Equities likely to move higher over the next six months: Study

Pakistan stock market is expected to outperform the Emerging Markets equity benchmark over the next six months, said BCA Research, a Canadian global investment research and investment strategy advice provider in its latest report.

BCA in its latest report titled ‘BCA Overweight View on Pakistan Equities’ said that Pakistani stock prices in US dollar terms are currently 20 percent lower than their January high and 56pc lower than their 2017 high. Meanwhile, the government projected a contraction in real GDP during the fiscal year 2019-20 (ending on June 30), the first in 68 years.

“We believe stock prices have already priced in plenty of negatives, and that Pakistani equities are likely to move higher over the next six months,” it said.

It added that strengthening the balance of payments (BoP) position and continuing policy rate cuts will increase investors’ confidence and benefit its stock market. “We also expect the Pakistani bourse to outperform the EM equity benchmark.”

The research firm recommended investors to purchase Pakistani equities in absolute terms and continuing to overweight this bourse within the emerging markets space.

The stock market will benefit from a business cycle recovery following the worst recession in history, worse than during the 2008 Great Recession.

“Fertilizer and cement producers, which together account for nearly 30% of the overall stock market, will benefit from falling energy prices, a significant cut in interest rates and supportive government measures,” it said.

BCA in its report informed that banks account for about 22pc of the overall stock market. Our stress test on the Pakistani banking sector shows it is modestly undervalued at present. Even assuming the worst-case scenario for non-performing loans (NPL), where the NPL ratio would rise to 17.5pc from the current 6.6pc, the resulting adjusted price-to-book ratio will be only 1.6.

“Both in absolute terms, and relative to EM valuations, Pakistani stocks appear attractive,” it said.

For, foreign investors who have bailed out of Pakistani stocks and local currency bonds since 2018. Ameliorating economic conditions will lure foreign investors back, the report said.

Whereas, for fixed-income investors, the report recommends continuing to hold the long Pakistani local currency 5-year government bonds position, which has produced a 12pc return.