Monetary easing to boost equity appeal amid improving macroeconomic outlook: report

The ongoing monetary easing, spurred by a disinflationary and improving macroeconomic environment, is set to enhance the attractiveness of equities, according to a report by AKD Securities. 

The stock market maintained its bullish momentum throughout the week ended on November 15, with the KSE-100 index closing at a record high of 94,763 points, marking a 1.6% WoW increase, achieving its highest-ever closing. 

The bullish momentum continues on the back of the accelerated pace of monetary easing by SBP and the IMF’s visit, which focused on structural reforms. During the Fund’s visit, the IMF mission held discussions with local authorities, focusing on the external financing gap and the Federal Board of Revenue (FBR) revenue collections. 

FBR officials assured the IMF that the revenue target would remain the same, attributing the shortfall in revenue collection during the first four months of FY25 to inaccurate economic assumptions, particularly regarding GDP growth, imports, and inflation. 

Both sides discussed short-term and long-term measures to address the potential revenue shortfall, including raising taxes on sugary drinks and importing machinery and raw materials. 

In the most recent T-bill auctions, the SBP raised Rs776 billion, with the majority of the participation focused on the 3-month bill. The yield on the 3-month bill decreased by 20 bps, while the yield on the 12-month bill increased by 10 bps.

Moreover, auto sector sales for October clocked in at 15,192 units, up 31% YoY. SBP held foreign exchange reserves increased by $84 million WoW, ending the week at $11.2 billion as of November 8, 2024. 

Average daily trading volume remained higher, up by 19.6% WoW, clocking in at 878.5 million shares, compared to 734.6 million shares traded in the last week.

On the currency front, the Pakistani rupee largely remained flat against the greenback throughout the week, closing the week at 277.67 against a US dollar.

The past week saw notable developments influencing market trends. The government is awaiting the IMF’s stance on the proposed mini-budget, while concerns emerged over solarisation and declining power demand affecting IMF negotiations. APM Terminals committed to investing in Pakistan, and Finance Minister Ali Aurangzeb invited Turkish firms for joint ventures. Meanwhile, Russia expressed interest in collaborating on the North-South Trade Corridor (NSTC).  

Transport, Woollen, Pharmaceuticals, Vanaspati & Allied Industries, and Glass & Ceramics sectors performed well, registering week-on-week (WoW) gains of 14.6%, 11.8%, 9.4%, 8.2%, and 6.5%, respectively. 

In contrast, Jute, Mutual Funds, Automobile Assemblers, Fertilizer, and Engineering sectors declined by 9.6%, 3.3%, 1.9%, 1.6%, and 0.3% WoW, respectively.

Flow-wise, companies led the net selling with $11 million, while mutual funds absorbed the bulk of the selling with a net purchase of $13.9 million. Among individual stocks, Searl gained 17.6% WoW, followed by EFUG at 17.2%, BNWN at 15.4%, TRG at 14.7%, and ABOT at 12.6%. 

On the lagging side, FCEPL declined by 9.7% WoW, THALL by 6.0%, MLCF by 5.3%, MUGHAL by 4.9%, and KOSM by 4.1%.

AKD Securities forecasted that continuation of monetary easing due to the disinflationary and improving macroeconomic environment would make investments in equities more appealing, currently trading at P/E of 4.2x and DY of 10.8%. The aforementioned factors, along with declining external financing requirements under the IMF program, would keep foreigners’ interests alive. We recommend sectors that benefit from monetary easing and structural reforms. However, modest economic recovery may limit the upside for cyclicals. Our top picks include OGDC, PPL, MCB, MEBL, FFC, PSO, LUCK, MLCF, FCCL and INDU.

AKD Securities projected that continued monetary easing, driven by a disinflationary and improving macroeconomic environment, would enhance the attractiveness of equities. Currently, equities are trading at a price-to-earnings (P/E) ratio of 4.2x and a dividend yield (DY) of 10.8%. These factors, coupled with a reduced external financing requirement under the IMF program, are expected to sustain foreign investor interest.  

The brokerage firm recommended sectors poised to benefit from monetary easing and structural reforms but noted that a modest economic recovery might cap the upside for cyclical stocks. 

AKD Securities highlighted its top picks, including OGDC, PPL, MCB, MEBL, FFC, PSO, LUCK, MLCF, FCCL, and INDU.