NBP Fund Management Limited
Economy: Encouragingly, the number of active cases of Covid-19 in the country has further dropped to 8,800 from the peak of 109,000. Regarding the development of an effective and universally available vaccine, researchers are testing 36 vaccines in clinical trials on humans, nine are in large-scale efficacy test, and three are approved for limited or early use. While the possibility of subsequent waves cannot be ruled out, as being witnessed in several countries, relatively low death rate and higher recovery rate raise hope that Pakistan has escaped the worst as earlier feared.
With the gradual re-opening of the economy from the Coronavirus-induced shutdown, we expect economic growth to pick-up in the coming months due to unleashing of pent-up demand in some sectors of the economy, steady increase in investment activity as a result of aggressive monetary easing, and recovery in the agriculture, real estate & services sectors. The frequently released economic data points to improving demand and supply situation after Coronavirus-induced disruption. During June-July 2020 versus April-May 2020, cement dispatches have surged by 47%, automobile sales have witnessed an increase of 337%, and retail fuel sales volume have shown a robust growth of 28%. We expect the economy to grow at 1.5-2.0% in FY2021 after a 0.4% contraction of GDP in FY2020.
Despite recent spike in CPI inflation driven by upward adjustment in retail fuel prices and rise in prices of some food items; inflation for FY21 is expected to moderate to 7%-8% after clocking-in at 10.7% in FY20. After an aggressive 6.25% reduction in the Policy Rate by the SBP in this easing cycle, in our view interest rates have bottomed out. We expect the central bank to continue with the accommodative monetary policy stance in the near term to stimulate the economy that is hit hard by the Covid-19 induced economic disruption.
External account has so far emerged beneficiary of the Coronavirus as strong workers’ remittances and a relatively large contraction in the imports vis-à-vis exports, the Current Account Deficit (CAD) has narrowed to USD 3 bn (1.1% of the GDP) in FY20. Backed by a record USD 2.77 billion workers’ remittances, a healthy 20% growth in exports, and a paltry 2% increase in imports on a month-on-month basis, the country has posted a sizeable current account surplus of USD 424 million in July 2020. We anticipate the CAD to widen to a still manageable level of USD 4.4 bn (1.7% of the GDP) in FY21. With Real Effective Exchange Rate (REER) at 93.0, and a manageable CAD, we expect a gradual 5%-6% devaluation of the PKR against the US Dollar in FY2021.
On public finance, slow growth of tax revenues and additional government expenditures in the 4th quarter of FY2020, the fiscal deficit widened to 8.1% of the GDP in FY2020. The fiscal deficit is expected to further expand to 9.3% in FY2021 against the government target of 7.0% due to elevated debt servicing cost, shortfall in revenue collections amid economic slowdown, and continuation of the additional government expenditures. Consequently, unveiling of additional revenue measures by the government to bridge the shortfall in revenues cannot be ruled out.
Stock market: During the Coronavirus-induced recessionary bear market, the benchmark KSE-100 Index fell by a hefty 37% from its peak level of 43,200 on January 13th, 2020 to the bottom level of 27,200 on March 25th, 2020. The market has staged a robust 51% recovery since then. While the second wave of the Coronavirus pandemic cannot be ruled out, we expect the economic recovery to continue. From the valuation perspective, despite sharp recovery, the stock market is trading at an attractive forward Price-to-Earnings (P/E) multiple of 7.8x and Price-to-Book (P/BV) value of 1.0x. The market also offers a healthy dividend yield of 5%. The historical analysis shows that the stock market has depicted robust performance during periods of low interest rates and manageable CAD.
Bottom Line: After robust rally, while market may depict enhanced volatility, we expect the market to deliver heathy double digit returns over the medium to long-term driven by good corporate earnings growth, attractive dividend yield, and some Price-to-Earnings ratio rerating. Therefore, we advise investors to build position in equities through our stock funds, keeping their long-term investment objectives in mind.