KARACHI:
The Pakistan Stock Exchange (PSX), the world’s best-performing market in FY24, is projected to soar by 36%, surpassing 109,000 points by the end of the fiscal year 2024-25. Despite this, FTSE Russell has announced the downgrading of Pakistan from its Secondary Emerging to Frontier Market, effective from September 2024.
Domestic research houses foresee minimal negative impact from this decision, given the country’s nominal weight in the global index. In a comprehensive report titled ‘Strategy FY2025…into the century zone’, Arif Habib Limited (AHL) Research anticipates a 36% return from the PSX benchmark KSE 100 Index in FY25. “The index is buoyed by potential negotiations of the International Monetary Fund (IMF)’s Extended Fund Facility (EFF) programme, a downward trend in the State Bank of Pakistan (SBP) interest rate, and a shift in investments from fixed income to equities, all expected to lead to a re-rating of the index.”
On Friday, the PSX reached an all-time high of 80,283 points with a nominal gain of 49 points, following a strong rally at the start of FY25. It surged by 89% (or 94% in US dollar terms) in FY24, closing at 78,455 points last Friday.
AHL Research highlights that the projected rally this fiscal year would be supported by an anticipated 3.2% improvement in economic activities, fuelled by improved agriculture yields, recoveries in industrial output, and services sector growth compared to 2.38% in FY24. Additionally, Pakistan is expected to enter a new three to four-year EFF programme with the IMF, likely amounting to $6-8 billion. Inflation is expected to average around 10.7% in FY25 compared to 23.4% in the previous year, alongside a moderate current account deficit and rupee depreciation, which would fuel the rally.
Pakistan’s current account deficit for FY25 is projected to reach $2.6 billion as import-led demand rebounds, with the rupee expected to average around Rs289/$. Earnings growth for companies is estimated at 4.9%, while excluding banks and exploration and production companies, earnings are expected to post 16% growth. This improvement in earnings is expected to help rebound the price-to-earnings (PE) ratio and support the market.
AHL Research notes that the KSE-100 is trading at a 2025 PE multiple of 4.2x, a valuation lower than the 5-year historic average of 5.9x.
Sectoral view
The turnaround in macroeconomics, coupled with improvements in microeconomics across various sectors and listed companies, is expected to support the market’s uptrend at the PSX this year. Subdued interest rates may suppress earnings growth for commercial banks, but banks will focus on volumetric growth and improved non-markup income. The curtailment of circular debt, higher payouts, and the sale of government stakes in Reko Diq and state-owned entities (SOEs) are likely to remain key triggers for oil and gas exploration firms. Strong pricing power in the fertiliser sector, stable offtake, and the ability to pass on gas tariff hikes to consumers would support sector performance at the PSX.
Demand for cement is likely to improve amid economic revival, with lower coal costs, higher retention prices, reduced finance costs, and energy-efficient initiatives boosting net earnings of construction material companies. Timely power tariff adjustments are projected to alleviate cash flow concerns and curb the accumulation of circular debt. Economic revival and lower oil prices are expected to support local petroleum product demand, benefiting oil and gas marketing companies. A global recovery in textiles is anticipated to drive demand, with reduced energy costs from the PM’s industrial package. However, a normal tax regime may impact earnings in the textile sector. Demand for autos is expected to recover following economic stability and lower interest rates, with hybrid electric vehicles (HEVs) likely to gain prominence due to fuel efficiency.
FTSE downgrades
Muhammad Awais Ashraf, Director of Research at AKD Securities, explained that FTSE Russell reclassified Pakistan equities from Secondary Emerging to Frontier Market effective September 2024 after one of the two listed companies’ market capitalisation (in US dollar terms) fell below the required level. The massive rupee devaluation over the past several months significantly reduced the market capitalisation of PSX companies in US dollar terms. Otherwise, PSX market capitalisation hit an all-time high of over Rs10 trillion with outstanding performance in recent times.
Ashraf stated that Pakistan failed to meet the minimum requirement of two securities to retain secondary market status. “We do not foresee any negative implications of Pakistan’s equities downgrade to Frontier Markets by FTSE Russell given its small weight and the exclusion of only one security.” According to FTSE Russell Emerging Market Criteria, the country will be downgraded if the combined investable market capitalisation of the eligible securities falls below five basis points of the FTSE Emerging All Cap Index, or the number of eligible index constituents falls below two. The FTSE Emerging Market Index currently has only one security with a market cap of $313 million out of a total market cap of $7,300 billion. Moreover, the FTSE Emerging All Cap Index includes 14 Pakistan securities out of a total of 4,423 securities, with a total market cap of $4,295 million, having a weight of 0.05%.
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