KARACHI: Share prices have hit rock bottom, thanks to the on-again, off-again International Monetary Fund (IMF) loan programme.

The price-to-earnings ratio, which shows whether a company is under- or overvalued, is expected to slip to 2.9 this year, a remarkably low level that tells investors that stocks are essentially going for a song. Yet there aren’t many takers. The total value of shares is down to around $23 billion from $100bn six years ago.

The latest ray of hope for stock investors came on Jan 31 when government officials sat down with a visiting team from the IMF and agreed to increase the price of electricity by at least Rs6 per unit in the short- to medium-term.

The IMF has already had the government undertake measures like a price hike of Rs35 per litre in petroleum products and a summary shift to a market-based exchange rate that made the dollar costlier by Rs25 in one go.

Speaking to Dawn, JS Global Head of Research Amreen Soorani said investor confidence is expected to rise once the macro-adjustments take place.

“Investors are eagerly expecting the revival of the loan programme and the subsequent dollar inflows from the IMF and other lenders. These adjustments should happen sooner rather than later,” she said.

Corporate profitability will take a dip because of the increased energy-related costs, she acknowledged. Moreover, the cost of production for companies that depend on imported raw materials will also jump because of the rupee’s devaluation, hurting their bottom lines.

“But the negative impact will be a near- to middle-term phenomenon. Setting the trajectory of the economy right is very important at this moment. That’s why these macro-adjustments are needed immediately,” she said.

Ms Soorani didn’t make a definitive projection for the benchmark of representative shares, but noted that the index is structured in a way that shields about one-third of its value from the effects of the ongoing adjustments.

For example, the banking sector that carries a weight of 20.3pc in the benchmark stands to gain in a rising interest-rate environment. The central bank increased the key interest rate to a 25-year high of 17pc last month. Even though non-performing loans inch up in such situations, the net impact of the interest rate hike will be positive for banks, said Ms Soorani.

As for the exploration and production sector with an index weight of 13.1pc, she said the sharp devaluation will increase its collective bottom line, thanks to the dollar-indexed returns of energy firms.

Cyclical sectors like cement, steel and auto that import raw materials will be hurt by the rising price of dollars. The course correction on the macro front will also cause demand destruction at a mass level, resulting in lower volumetric sales, she said.

“Looking at the low multiples in these sectors, it seems that investors have already priced in the negatives,” she added.

Published in Dawn, February 2nd, 2023