Pakistan equity markets have consistently delivered phenomenal returns over the last 6 years hitting record after record every year with benchmark KSE 100 rising to 34,399 level on June 30, 2015 from 7162 in June 2009, translating into a staggering (CAGR) return of 30% per annum.
After this strong run, many investors, very understandably, are thinking whether the stock market would continue to post robust returns going forward. We highlight that naively looking at the index level would be misleading without considering the key drivers of the stock market such as interest rates, corporate earnings growth, market liquidity, stock market valuations, and economic prospects, etc.
Our analysis shows that corporate earnings have grown around 14% per annum during the last 6 years whereas the dividend yield has averaged around 7%. Thus, roughly 3/4th of the rise in stock market in the last 6 years is due to earnings growth and dividends, while just 1/4th is attributed to the PE rerating. Consequently, despite this strong run the stock market is still trading at a reasonable 9.6 time forward earnings multiples and offering around 5% dividend yield.
Going forward, we expect acceleration in economic growth driven by pick-up in public sector investment, thaw in political situation, ameliorating law & order situation; and benign inflation and interest rate outlook due to soft commodity prices, contained fiscal deficit, and stable exchange rates. Based on the reasonable valuations and improving macro economic situation, we hold a sanguine view on the stock market and expect attractive returns driven by gradual rerating, decent corporate earnings growth, and handsome dividend yields with some detour along the away.
We advise investors to resist the urge to abandon equities simply because of high volatility associated with stock market. Given a paltry 6%-7% return offered by bank deposits and T-bills, we recommend investors with medium to long-term investors to allocate a portion of their portfolio to equity market that still holds potential to deliver relatively better returns than the alternative fixed income avenues. However, we acknowledge that investors may experience bouts of volatility spikes from the recent diminished levels emanating from evolving economic, financial, and geopolitical developments.
Sajjad Anwar joined NAFA in June 2007 and gradually progressed to the position of Chief Investment Officer. As head of investment management function at NAFA, he has successfully launched and managed several mutual funds and advisory portfolios in equity, fixed income, and money market categories with a superior performance track record. Prior to joining NAFA, he was working as Manager Strategic Risk Management with Army Welfare Trust (AWT). He also served Shifa Foundation as Asst. Manager Finance & Accounts. Mr Sajjad Anwar holds an MBA in Finance and is a CFA Charterholder.
(Sajjad Anwar CFA, Chief Investment Officer NBP Fullerton Asset Management Limited)
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