AKD Quotidian about — Pakistan Market: Foreign interest leading the way

Karachi, May 22, 2013 (PPI-OT): Foreign investors pumped a robust US$26mn into the Pakistan Market yesterday where a strong uptick in FPI flows (US$221mn CYTD as per Bloomberg) has dilven the KSE-1 00 Index to return 25%CYTD.

According to AKD Securities considering this recent foreign inflow (0.5% of total market capitalization) is significantly lower than for regional peers such as India, Philippines, Vietnam and Taiwan, and that Pakistan still trades at a steep 38% discount to the MSCI Asia Pacific Index, AKD Securities believes foreign investors will likely remain engaged with the Pakistan Market.

This should lead to a continued rerating in valuation multiples, provided clarity emerges on foreign assistance, where current PIE of 8.5x compares favourably against average PIE of 9.Ox in a single-digit interest rate environment (peak PIE of 13x).

In this regard, while Nishat Group stocks have been among the top gainers CYTD. several quality companies such as BAHL, FATIMA and FFC have deeply underperformed the Index and may potentially depict a catch-up rally going forward. In addition to these, AKD Securities also retain preference for DGKC, ENGRO, PTC, PSO and NML.

Foreign interest can continue: According to Bloomberg data, the Pakistan Market has witnessed Net FPI inflow of US$221 mn CY1 3TD (NCCPL data: US$279mn CY13TD). This compares against net inflow of US$126mn across full-year CY12, when foreign investor interest was a key driving force behind the KSE-100 Index’s 49% rise. While foreign inflows into Pakistan have sharply accelerated of late, CY13TD FRI is still only about 0.5% of the total market capitalization of -US$47bn.

This is significantly lower than 2.3% for India and also lower than O.63%-O.85% for Taiwan, Vietnam and the Philippines. This, together with Pakistan’s continued steep discount to the region (38% discount to the MSCI Asia Pacific Index) leads us to believe foreign investors will likely remain engaged with the Pakistan Market.

Rerating underway: The KSE-100 Index has returned 25%CYTD to trade at a forward PIE of 85x, a 28-month peak. In this regard, AKD Securities speculate that investors are assigning a lower risk premium to the Pakistan Market where Pakistan’s CDS spread has contracted to 9.08%, down from recent peak level of 10.8% in Mar13. Going forward, the rerating process I ray continue if there is no reversal in the monetary policy cycle, particularly if materialization of any foreign assistance (e.g. Saudi oil facility; tirther release of CSF) alleviates the Balance of Payments position in the near-term. Note that the Pakistan Markets PIE has averaged 9.Ox in a single-digit interest rate environment (peak PIE of 13x).

Focusing on underperformers: While Nishat Group stocks have been among the top gainers CY13TD, several quality companies have deeply underperformed the KSE-100 Index and could potentially depict a catch-up rally going forward.

These laggards include BAHL, FABL, FATIMA, FFC and LOTCHEM, among others, which have all posted negative returns relative to the index. In addition to these, AKD Securities also retain preference for DGKC, ENGRO, PTC, PSO and NML. Risks factors remain in the form of Balance of Payments concerns, a slowdown in profitability growth for Index heavyweights Banks and Oil and Gas and any negative shock in the upcoming FY14 Budget.

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