IGI Securities Limited – Strategy 2016

Karachi, December 23, 2015 (PPI-OT): Pakistan Equity Market Outlook: 2016

For investors, CY15 have been a year of volatility, as global equity markets rattled to slowing China economic growth, dropped commodity prices and fluctuating currency markets.

In 2016, IGI Securities Limited are eyes an index target in the range of 36,500-37,500, which at current closing of 32,641, offering a market return of +12-15%.

Performance

For investors, CY15 have been a year of volatility, as global equity markets rattled to slowing China economic growth, dropped commodity prices and fluctuating currency markets. Reflecting this uncertainty, Equity markets across has sold-off heavily over the past months. For KSE 100, things weren’t different. After years of showing strong performance, KSE100 returns have now flattened out. CY15 to date, market return now stands at +0.6% (-0.7% in USD terms). This was despite, favourable economic environment, with historic low interest rates and depressed commodity prices.

Long-term case for stocks remains intact

With stable earnings and the potential for rebounding valuations in some sectors, total-return prospects for equities remain compelling in IGI Securities Limited’s view. A combination of factors feed into IGI Securities Limited’s optimism over equity market performance in 2016. Low interest rate environment with no material rebound expected in commodity prices along with improved domestic law and order situation and a pick-up in economic growth. KSE 100 equity valuations across the board were broadly fair. However, recent months of continued foreign selling has pushed market valuation even below their historic averages and significantly below its regional peers.

Outlook: IGI Securities Limited eyes an index target in the range of 36,500-37,500

In 2016, IGI Securities Limited eyes an index target in the range of 36,500-37,500, which at current closing of 32,641, offering a market return of +12-15%. IGI Securities Limited’s target is simply based on re-rating of P/E multiple from 8.6x to 9.5x, which in-line with its historic average. IGI Securities Limited has incorporated a ~1% earnings growth, compared to average ~15% in past three years. The below par earnings growth of ~1% is largely due to the decline in E and Ps and banking sector profitability.

Ex-Oils and Banks, earnings growth are estimated at ~17% in CY16. However, IGI Securities Limited does not rule out the idea of even stronger market re-rating, potentially coming from a) inclusion of Pakistan in MSCI Emerging Market index, b) upward re-rating of Pakistan Sovereign Rating, and c) nearing completion of mega projects under CPEC arrangements.

Sector-Specific Opportunities

IGI Securities Limited sees sector specific opportunities opening up in 2016. Cements, Steel and OMCs are well poised to benefit on current economic settings. Low inflation and rising per capita income could lead positive earnings surprises in Auto, Consumers, Pharmaceuticals and Insurance sector. For E and Ps and Banks uncertainty over oil prices and interest rate scenario, will keep sector returns under pressure. However, in IGI Securities Limited’s view rock-bottom prices for these two sectors, offers value-investment opportunity.

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