An uncertain PSX

Published January 2, 2023

Returns in the stock market have either barely beat inflation or been outright negative for six consecutive years.

A portfolio of investment — left untouched since the end of 2016 in the top 100 companies of the stock market — would’ve shrunk by more than 15 per cent in absolute terms over the last six years.

Will 2023 be any different?

According to Arif Habib Ltd CEO Shahid Ali Habib, two “events” will determine the stock market performance going forward.

“A successful review by the International Monetary Fund (IMF) of the loan programme will give us economic certainty. A peaceful election will introduce political certainty. A lot depends on these two events,” he told Dawn in an interview.

Investors should look for companies that are posting strong earnings growth… companies that have done well even in the ongoing economic downturn

Hardly a day goes by when stock market analysts don’t blame political instability for the persistent downward swing in share prices. Even if the election took place earlier than October 2023, there’d still be no guarantee of the political turmoil subsiding in the absence of an absolute majority by one party in parliament.

No wonder cautious optimism is the guiding principle on I.I. Chundrigar Road.

“We expect the index to touch 49,300 points by December,” said Mr Habib with respect to the benchmark of share prices that closed 2022 at 40,420 points. In other words, his brokerage expects share prices to gain nearly 22pc on average in the new calendar year.

“Our valuations have hit rock bottom. The multiple of four will get rerated only if we get economic and political certainty,” he said while referring to a widely used indicator of how expensive or cheap the current share prices are.

Minus any untoward development, Mr Habib believes the market will start seeing a solid recovery in the second half of 2023.

The key interest rate that determines the cost of funds for debt-reliant big corporates will start dropping around June and July, he says. That’s because inflation will become relatively “normal” as the low-base effect is likely to kick in around the middle of 2023. That’ll give reason to the central bank to bring down the interest rate, he says.

Meanwhile, all those cash-rich insurance companies and mutual funds that offloaded their equity holdings in 2023 will switch gears and get back onto the buying side, he says. That’ll jumpstart a stock market rally in the second half of 2023, with the index regaining some of the losses it recorded over the many previous years.

“Investors should look for companies that are posting strong earnings growth… companies that have done well even in the ongoing economic downturn,” he says.

As an example, he says 2023 is likely to be good for fertiliser, technology and energy exploration and production firms. “Oil and gas exploration companies benefit from devaluation because of their dollar-hedged returns. Technology companies will also gain from a higher exchange rate. Fertiliser will continue to outperform other sectors given that subsidies to agriculture aren’t going away anytime soon,” he says.

In contrast, Mr Habib expects cement and steel sectors to post lacklustre performance. Large-scale manufacturing growth is low. They’re suffering because of low demand and a high-interest rate environment, he says.

Speaking to Dawn, Topline Securities Ltd CEO Mohammed Sohail said investors should expect the shares market to remain dull in 2023. “The repayment of dollar-denominated loans, as well as relentless political strife ahead of the October election, will keep the market under pressure,” he said.

His brokerage house expects the index to go up to 47,000 points in 2023. This means an upside of 14pc — a rate that hardly compares favourably with less-risky fixed-income securities.

Pakistan is passing through “one of toughest times” in its history, he says. The country’s so-called funding gap — meaning external debt repayments and the deficit in the current account — is as high as $31 billion for the ongoing fiscal year. For perspective, the same gap bounced within the range of $10bn-$17bn at the height of the financial crisis of 2007-08.

Mr Sohail said the country should opt for a wholesale restructuring of its loans with bilateral lenders, especially China, which owns over 30pc of Islamabad’s external debt.

More importantly, the ongoing IMF loan programme is scheduled to be over in May 2023 — something that’s likely to have “significant implications” for the wider economy as well as the stock market.

He suggested investors should search for “high-quality, non-cyclical stocks” of businesses that gain from a weak rupee and a high interest rate. “Banking, exploration and production, fertiliser and technology sectors should be on the radar of investors,” he said.

Published in Dawn, The Business and Finance Weekly, January 2nd, 2023

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