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A crucial week begins for Pakistan’s equities. Today, the monetary policy is expected to be announced. Tomorrow, the IMF team is expected to visit the Q-Block, and the day after the PIB auction is scheduled amid hopes and fears stemming from the recent round of FATF talks in Thailand that ended late last week.

In its last monetary policy statement (MPS), the central bank had given a clear policy direction towards an end to upward cycle. But while most market players think interest rates have peaked, hardly anyone is expecting a rate cut in the policy today. Last week’s poll by brokerage Intermarket Securities Ltd showed that out of 23 brokerage houses, 22 expect a status quo in the MPS; only one brokerage, Arif Habib Limited (AHL), expects a rate cut of 25 basis points. Which means that while an actual rate cut will come as a surprise and sharply boost sentiments, all eyes will really be on the language of the MPS.

AHL’s research team believes that the rebasing of CPI, which has reduced inflation outlook, the shaving off of 31 basis points from the cut-off yield of 12-month Treasury Bills’ last auction, and the slipping of secondary market benchmark PIB yields point to a rate cut today. Their analysis does not seem to be taking into account talks of soft understanding with the IMF to keep real interest rates around 300 bps. But by day end today, that position will be clear – and that will accordingly set the tone for equities market till further developments. (See BR Research’s Monetary policy: status quo for now likely, Sep 13, 2019)

Also setting the tone will be the news flow streaming in from the visit of IMF’s delegation due tomorrow. It might take some time for that news flow to reach the market, considering that formal press conference or document release is not expected, and real inside chatter sometimes takes a few days to come out. The importance of IMF team’s visit has been downplayed by local authorities, but let’s face it, it’s not as if the IMF’s staff was getting bored at their offices and decided to visit Pakistan to Netflix and chill over a cup of tea.

The PIB auction due the day after will perhaps give the best indication of market’s reading of the MPS today. AHL’s research noted in their 6-Sep note, ‘decline in 10-yr PIB yields usually precedes a cut in discount rate. This phenomenon can be seen from the historical graph of discount rate and secondary market PIB yields.’ By Wednesday’s close, the market will know whether or not this history repeated itself.

On that note, BR Research’s regular readers can recall the discussion on how a change in the direction of 90-day moving average of 10-year PIB signals a change in direction of benchmark equities index (KSE-100). It so happens that the 90-dma has begun to turn, pointing to a north-bound movement in stocks. This somewhat echoes what Adnan Afridi, MD of National Investment Trust, said in his interview with BR Research. (See Brief Recording published Sep 13, 2019)

He said: for fixed income, you need to take at least a one-year view and let’s say you get 12-13 percent return on that, which is unlikely to compensate for the loss an equity investor is taking at these levels. If anyone was to actually invest more in the equity market today or even retain their original in the market today, they are going to get 10 to 11 percent in dividends, and a good chance of double-digit capital gain, which is simply two upper circuits away.

Pakistani stocks are undervalued, and some stocks are undervalued even more. Their prices are very low in comparison to sales, earnings, the value of their asset books, and even relative to GDP and GDP growth. Adnan pointed out that “there are at least 20 stocks that are trading at less than half of their book value, some even at one-third of their book value…there are also 20 to 25 listed companies currently trading at a forward P/E of less than 3x, when, in fact, those stocks have historically not traded at less than 5x to 6x. There are more than 10 stocks whose dividend yield today exceeds fixed income returns.”

This is indeed an era of doubt, and to be completely gung-ho about any investment view at such a time may burn fingers. Yet it increasingly seems that the bear’s last mile was over when the KSE-100 hit nearly 28,000 points. The road to recovery, however, may still be long and winding with slippery slopes aplenty. Smart money can be expected to cherry pick and prepare for a long consolidation, sans unexpected outcomes from the FATF and Pak-India front. (See also BR Research’s Bears last run? July 29, 2019, Bears’ last mile or two! Aug 6, 2019, Reading KSE-100 published Aug 20, 2019).





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