Morning Briefing for November 16, 2012 – Standard Capital

Karachi, November 16, 2012 (PPI-OT): How to interpret market when economy is losing its luster

Pakistan market is bracing all time high levels above 16000 whilst country’s economy is fast losing its resilience given poor fundamentals.

According to Standard Capital, benchmark index has risen by 43% during CY12 where many scripts have outperformed the index by more than 100%. Standard Capital’s foreign exchange reserves have fallen this week to nearly US$ 13.8 billion from US$ 14.3 billion with payments being going on to IMF over standby arrangements. This spells alarming situation as far as economic outlook is concerned.

Pre and post election worries
Pakistan is also bracing for elections and transfer of power to those who are elected by the masses yet there are burgeoning problems such as free fall of Rupee in the absence of fledgling ‘real economy’. Pakistan is already adjusting nearly US$ 2 billion in less than three months to IMF against its balance of payment and exchange rate support facility which would certainly wear down Rupee value against US Dollars since acute electricity shortage would devastate production in industries. Even new government would not going to bring magic wand to solve energy shortage issue and any ‘hung parliament’ may impair decision making ability. Then there is serious disorder in law and order which needs a political resolve.

Pakistan market is in limelight despite economic worries
Despite the fact that Standard Capital’s market is still tagged with growing ‘African’ economies i.e. in the Frontier Market MSCI index instead of more vibrant Emerging Market index yet Standard Capital feels that time is ripe for re-rating in following CY13 since Pakistani capital markets shall be more viable after the advent of de-mutualization since many European and especially Russian investors are vying to gain stakes wherein Standard Capital sees new insignia which could put Pakistan on world markets. Stock exchange is also looking towards index tracker fund along with options trading. Only worry behind these ambitious measures is the weak economic outlook especially when Pakistan does not enjoy any ‘comparative advantage’ other than textile trade wherein other Asia Pacific region has found edge in advanced technology.

Valuations not that compelling other than
Benchmark KSE 30 is yielding PE of 8 times against expected earnings wherein KSE 100 has notched PE of 9x wherein there are concerns related to poor growth numbers in present fiscal. Pakistan’s oil and gas exploration is yielding FY13 PE of 8x wherein some of the traditional dividend yielding power sector is yielding PE of 6x. Other than that only textile sector valuations look somewhat compelling that is many good textiles yield PE of 2x.

Standard Capital advices investors to focus on key dividend paying and earnings growth stocks such as POL, PPL, HBL UBL, DGKC, HUBC, NCPL, FFC, FFBL etc.

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