Positive sentiment at PSX likely to persist until March: report

Pakistan Stock Exchange (PSX) is expected to maintain a bullish trend in the near term, with positive sentiment likely to persist until March, according to a recent report by AKD Securities.

However, the report cautioned that the sustainability of this bull run hinges on the successful completion of the next IMF program and the implementation of long-term reforms.

The report, titled “From dark clouds to sun-kissed skies – CY23 Pakistan”, suggested that investors should take advantage of the still attractive valuations (forward PE below 4x) and invest in companies with strong fundamentals and appealing dividend yields while being mindful of the changing political and economic situation.

Stock market faced a gloomy start to 2023, as inflation soared to an average of 33% in 1HCY23, up from 14.4% in the same period last year. The central bank responded by hiking policy rates by a massive 600 basis points, reaching 22%. 

The external situation was also grim; the SBP’s foreign reserves shrunk to a paltry $2.9bn in February, barely enough to cover 0.7 months of imports. To conserve dollars, the government imposed restrictions on non-essential imports, leading to a slowdown in large-scale manufacturing (17.3%). The rupee, caught in the crossfire, depreciated by 21% during the first half. 

Despite these challenges, the KSE-100 index surprised everyone, giving positive returns of 2.6% due to the low base. However, market activity stayed low with an average traded volume of 239 million shares, the report said.

The benchmark KSE-100 outperformed all global indices in the second half, with returns of 50.7% (US dollar return: 52.2%). The $3 billion IMF-Pakistan deal sparked foreign inflows, which along with currency controls, anti-smuggling measures, and the SIFC, improved macro indicators and investor confidence. The election date announcement eased political tensions, while the first IMF review, World Bank and ADB approvals further strengthened optimism. 

The market offered a cheap valuation (forward PE of ~3x and dividend yield above 10%), attracting bargain hunters. This confidence led to a jump in market activity with average traded volume rising to 627 million shares in the second half, with December seeing a record of 1.3 billion shares traded. Overall, for the full year, KSE100 returns reached 54.5%, closing at 62,451 points at the year end.

Meanwhile inflation surged significantly, projecting a full-year rate of 30.9%, compared to 19.7% in CY2022. With stringent import restrictions in place, the current account showed restraint, reporting a deficit of just $126 million for 11MCY2023, a significant drop from US$11.8 billion in the same period of last year. 

A historic milestone was reached with the first-time announcement of quarterly GDP, revealing a 2.13% growth in September 2023 and revising the FY23 GDP to -0.17%. Despite an ambitious tax collection target of PkR4.425 trillion, the FBR exceeded expectations by collecting PkR4.468 trillion, surpassing the set target by PkR 43 billion. Post-IMF SBA, unlocked inflows contributed to the rise in SBP-held reserves, reaching $7.8bn as of Dec 22, 2023. 

The currency front witnessed volatility, with the rupee depreciating to its lowest at PkR307.1 against the US dollar in September 2023. However, administrative controls and a crackdown on the gray market stabilised the rupee, closing at PkR281.86 at year-end, reflecting a 20% depreciation.

According to the report, the year saw a surge in corporate buybacks, with companies seizing the opportunity to repurchase their own shares at attractive prices. A total of nine buybacks were completed, amassing PkR38 billion, and three more were still ongoing at year-end. 

On the flip side, IPOs witnessed subdued activity with only Symmetry Group managing to raise a significant $435 million, compared to three IPOs raising PkR1.3 billion in CY22. Rights issues also saw a decline, with PkR6.8 billion raised through six offerings compared to PkR8.8 billion in the previous year.

With cheap valuations and improving profitability attracting investors, all major sectors delivered positive returns. Leading the charge was the auto parts sector, benefiting from relaxed import restrictions and posting a phenomenal 108% return for the year. 

Furthermore, the new announced refinery policy also fueled investor interest, pushing the refinery sector’s return to 85.3%. Chemicals and power sectors followed suit, with improving margins and attractive dividend yields leading to returns of 73.7% and 70.7%, respectively. 

Conversely, sectors like modarbas, property, and textile spinning struggled, facing headwinds and posting declines of 16.8%, 16.4%, and 7.0%, respectively.

Company buybacks emerged as the dominant theme in terms of market flows, contributing a net $129 million. Moreover, foreign investors joined the bandwagon, net buying US$73.5 million, with their interest concentrated in banks, power, E&P, and cement sectors. Interestingly, mutual funds remained net sellers, offloading $132 million.