NBP Fund Management Limited
Economy: Pakistan’s economic recovery that accelerated since March 2021 has gained further traction on account of strong growth of manufacturing and agriculture sectors. On the back of improved business confidence and robust consumer demand, the Large-Scale Manufacturing Industries (LSMI) witnessed a strong 12.74% YoY growth in August 2021. The overall growth of LSMI during Jul-Aug 2021 clocked in at 7.26%, surpassing the pre-pandemic level. The buoyancy in economic activity is also corroborated by the frequently released economic data such as power consumption, cement dispatches, automobile sales volume, and sales of retail fuel. Led by the robust growth in manufacturing sector and uninterrupted activity in the services sector, we anticipate GDP growth of 4.3% in FY22.
The robust recovery in domestic demand, coupled with sharp surge in global commodity prices, have led to a hefty import bill and a large Current Account Deficit (CAD). Concerns have resurfaced on the Balance of Payment (BoP) emanating from the widening of CAD that clocked in at USD 3.4 billion in 1QFY22 compared with a current account surplus of USD 865 million during the same period last year. However, unlike the past episodes, this time around, the policymakers seem prepared to better navigate the pressure on the Balance of Payment (BoP) position by deploying the right mix of the available policy tools. The recently enacted policy actions such as large currency devaluation, broadening of the scope of 100% cash margin requirement on imports, levying of regulatory duties on non-essential imported items, and tapering of monetary stimulus by the SBP is expected to contain the import bill going forward and ease pressure on Balance of Payment. Looking ahead, based on the economic growth trajectory and elevated commodity prices, we anticipate the CAD to widen to USD 9.5 billion (3% of GDP) in FY22. Kingdom of Saudi Arabia recently announced to provide financial support to Pakistan with USD 3 billion safe deposit for one year (till the completion of the International Monetary Fund programme scheduled for September 2022) and USD 1.2 billion deferred oil payment facility. After the news of the Saudi support of USD 4.2 billion for Pakistan, Pak Rupee reversed the declining streak. According to the SBP data, Pakistan’s Real Effective Exchange Rate (REER) has declined to 95.86 as of September 2021 from 96.54 in August 2021. Despite a large CAD in 1QFY22, helped by the receipt of USD 2.7 billion from the IMF on account of SDR allocation and a cumulative inflow of USD 2.4 billion in the Roshan Digital Account (RDA), the SBP’s FX reserves stand at USD 17.1 billion as of October 22nd 2021.
Regarding the public finance, on the back of higher imports, the Federal Board of Revenue (FBR) has collected Rs. 1.84 trillion in 4 months of FY22, an increase of 37% or close to Rs. 500 billion over the same period last year and Rs. 228 billion higher than the target set for July-October 2021. On Covid-19 front, the infection ratio in the country has fallen below 1.5% and active cases have dropped to around 23,000. The vaccination drive has picked-up pace as 103.5 million dozes have been administered so far. Considering the recent progress, majority of population is expected to get inoculated in the next couple of months. While maintaining the necessary precautionary measures against Coronavirus pandemic, all restrictions have been lifted in cities with maximum vaccinated population.
With regard to the status of USD 6 billion Extended Fund Facility (EFF) programme with the International Monetary Fund (IMF), Advisor on Finance Mr. Shaukat Tareen while addressing a news conference said that they have come close to an agreement with the IMF on the 6th review of the EFF as almost all things have been finalized except one issue and the differences will be ironed out in a day or two. The government has already met many prior conditions such as large currency devaluation under flexible exchange rate regime; committed to abolish some of the tax exemptions to enhance tax revenues; commenced monetary tightening cycle with a token 25 bps hike in the Policy Rate by the SBP; and jacked up electricity tariff to contain the flow of circular debt.
Stock Market: After witnessing negativity in the first half of October, positivity returned to the market during the latter half as the benchmark KSE 100 Index surged by 2.9% on a month-on-month basis. However, despite attractive market fundamentals, during CY21 through October, the stock market has delivered a modest 5.6% return. This lackluster market performance is attributable to investors’ concern on the corporate profitability after a sharp currency devaluation & steep surge in global commodity prices; worries over the Balance of Payment (BoP) position emanating from a large Current Account Deficit (CAD) of USD 3.4 billion during 1QFY22; and shifting Pak-US relations amid the developments in the neighboring Afghanistan with possible spillover effects on Pakistan. However, in our view, the prevailing market valuations reflect overblown pessimism and we see the current market levels as a buying opportunity for investors with medium to long-term investment horizon.
Looking ahead, we reiterate our positive view on the stock market driven by: (i) attractive valuations as captured by the Price-to-Earnings (P/E) multiple of 5.9x; (ii) robust corporate profitability expected over the next two years; (iii) abundant market liquidity; and (iv) easier financial conditions. Contrary to the overblown concerns, we believe that the recent currency devaluation is unlikely to derail the ongoing growth momentum. Unlike the past episodes, this time around, the policy makers seem prepared to better navigate the pressure on the Balance of Payment (BoP) position by deploying the right mix of the available policy tools. We believe that the IMF and Pakistan would soon reach staff level agreement. The successful completion of the review will pave the way for the release of the USD 1 billion from the IMF and facilitate flows from other multilateral agencies such as the Asian Development Bank, World Bank, and Islamic Development Bank.
Regarding the corporate profitability, in the undergoing corporate results season, majority of the companies have reported robust earnings growth, surpassing market expectations by a wide margin. We expect healthy corporate earnings growth over the next two years as companies are gradually passing on the increasing input costs to maintain profit margins due to resilient consumer demand.
From the fundamental perspective, the market is trading at an attractive forward Price-to-Earnings (P/E) multiple of 5.9x versus 10-year average of 8.3x. On a relative basis, 16.9% Earnings Yield offered by the market coupled with a healthy 5.7% dividend yield looks appealing compared with 10-year PIB yield of 11%. As cited by the SBP in its last monetary policy statement in September, we anticipate continuation of the prevailing monetary accommodation with a gradual and measured increase in the Policy Rate, going forward.
The Bottom Line: The market is well poised to deliver a healthy double-digit return in FY22, and beyond. Therefore, investors with medium to long-term investment horizon are advised to build position in the stock market through our NBP stock funds.
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