Equities: The preferred asset class

July 14, 2020 (MLN): As the Covid-19 pandemic created mayhem which has suffered all asset class and the equities have not been spared. However, on domestic front, a consistent reduction in the daily incremental cases of COVID-19 as well as its infection rate have helped to fuel sentiments at the local bourse.

This, in addition to several other key triggers have now made equities as a preferred asset class, a report by Arif Habib Limited highlighted.

According to the report, the government’s incentives package for the construction industry is likely to bode well for cyclical sectors such as cement and steel.

Moreover, economic recovery from incentives will revive the manufacturing sector through vast reduction in import duties as government is eyeing GDP growth at 2.1% for FY21 as compared to -0.4% in FY20. Besides, continuation of the IMF Extended Funding Facility (EFF) alongside several incentives announced in the FY21 budget to support local production should help market sentiment, the report added.

Furthermore, lower inflationary outlook for FY21 at 7.5% as compared to FY20 inflation of 10.8% will support consumer spending and economic activity.

The report further declared that significant gap between equity earnings yield and yields on the 10-year PIB could soon trigger market sentiment and help towards a re-rating as the average difference between the two has historically been approximately 1% as compared to 6% currently.

Additionally, with the cumulative 625 bps interest rate cut since Mar’20, equities are once again in the spotlight as a preferred asset class among investors, the report highlighted.

Likewise, the restriction imposed by the government on institutional investors to participate in National Savings Scheme after July 1, 2020 to redirect them to other parts of the financial sector should also bode well. Expected flow of funds from fixed income to equities should help trigger market performance, the report said.

This indicates that asset Management Companies and Insurance companies will likely mobilize funds from Fixed Income to Equities to generate healthy returns for their investors.

Thus, the inflows from all these domestic institutions and HNWIs will likely drive the market going forward with equities becoming highly attractive as an asset class, the report concluded.

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