Despite a poor show in 2022, one of Pakistan’s prominent brokerage houses expects the benchmark KSE-100 Index to generate a positive return of over 20% to close near the 50,000 level by the end of this year.

Arif Habib Limited (AHL) unveiled its ‘Pakistan Investment Strategy Report 2023’ on Sunday, saying the KSE-100 is expected to close at 49,374 points by December 2023.

The projection comes as the equity bourse posted a dismal performance during 2022 to close at 40,420 points (down by 4,172 points, - 9.4% YoY).

In USD terms, the return was even more disappointing (-29.3% YoY) given the relentless pressure on the Pak Rupee in the outgoing year, said AHL, in another report titled ‘Market Performance CY22 Round-up’ released earlier.

“We find it pertinent to highlight that despite the year being relatively disappointing for equity market investors, PSX fared much better in terms of local currency return compared to other international markets.

“Panic was observed in most stock indexes, which suffered greatly amid uncertainty in the global economic climatestemming from stringent monetary tightening to combat high inflationary readings post commodities’ spikes. Without price stability, and stable growth in the labour market, slowdown in aggregate demand compounded fears of an imminent recession in the US and Europe. A dire geo-political scenario, bearing in mind the Russia-Ukraine war, eroded sentiment.

“While global investors sided with caution, market participants of the domestic bourse also took account of the political impasse in Pakistan, which began well before ex-premier (Imran Khan) was removed by a vote of no confidence.

“Moreover, a spectrum of economic issues triggered by another external account crisis and an ongoing bout of high CPI (Consumer Price Index), which despite multiple policy rate hikes during the year, also overshadowed any positive news,” it said.

As per the report, major foreign offloading was witnessed in commercial banks ($126 million) given the impact of economic slowdown on banking NPLs, and some compliance issues in large banks; cement ($15 million) owed to demand slowdown coupled with high coal prices; and fertiliser ($13 million) attributable to demand erosions post floods and high fertiliser prices.

“Our forward P/E (Price to Earning) for 2023 arrives at 3.8x, which is even lower than the trough P/E of the 2008 financial crisis (4.1x), and at a noteworthy discount to historical average P/E of 7.9x. While earnings growth is expected at 11.8% in 2023,” said AHL in its Pakistan Investment Strategy 2023.

The brokerage house pointed out that Pakistan, which remains engulfed in huge external debt issues, requires the International Monetary Fund (IMF) programme to alleviate its economic woes.

“We believe another IMF program remains the only choice,” said AHL.

“We expect Pakistan to complete the current programme with another one post general elections which will be essential to address both long-term structural issues as well as external financing needs,” it added

The report highlighted that the government estimates disbursements of $103 billion during the next three years to finance its funding requirements using a combination of bilateral, private debt, and multilateral flows.

“To unlock these flows, it is pertinent that Pakistan stays engaged with the IMF for the long term,” said the brokerage house.

AHL expects GDP growth at 1.78% during FY23 against 5.97% last year. The decline is attributed to floods devastation, delays in external financing, political noise, high inflationary pressures and monetary and fiscal tightening.

The current account deficit is expected to narrow down to $7.2 billon i.e. 2% of GDP, in FY23.

“A combination of lower revenues, higher flood spending, and rising borrowing costs is likely to keep the fiscal deficit around Rs5 trillion (5.9% of GDP).

“AHL expects a tight monetary policy stance to continue until August 2023. We expect inflation to ease off to 11%-13%, providing room for a rate cut. With international commodity prices down and the high base effect kicking in, inflation should come down, in 2023,” it said.

On currency, the brokerage house expects SBP to gradually loosen administrative measures as the IMF’s 9th review concludes and other flows materialise. “In this backdrop, we expect the PKR/USD to depreciate to 250/263 by Jun/Dec’23,” it said.

On the political front, AHL expects general elections to take place latest by the third quarter of CY23.

“We expect the new government to take tough measures that deal with structural reforms at the onset of a 5-year mandate, with limited concerns regarding damage to political capital,” it said.

On the geopolitical front, a primary concern on the foreign policy front lies in the face of mounting tension with the Afghan Taliban government. Meanwhile, China will likely continue keeping Pakistan close to itself, it said.