November 27, 2024 (MLN): The benchmark KSE-100 index will likely reach 130,000 by the end of CY25 primarily on the back of multiple re-rating, according to a report by Insight Securities.
"Energy sector stocks will remain in the limelight due to their improved cash generation and possible resolution of overdue receivables, which can induce higher payouts and investment in growth-oriented projects," the report reads.
High-yielding and leveraged stocks will also remain attractive in a declining interest rate environment. Moreover, sectors which have a high dependence on imports and reasonable pricing power such as the pharmaceutical sector, will also perform better amid a stable currency outlook .
The report further noted that banking sector profits are expected to decline amid monetary easing.
"Despite healthy returns in the past 1.5 years, where the KSE-100 index returned 128%, we believe that the market has still much to offer," it said.
The index is still trading at a forward P/E of 4.7 x vs a 10Y average of 7.1x. On the P/B ratio, the KSE -100 index is trading at 0.9 x vs 10Y average of 1.3x.
The flow of funds from money markets towards equities will remain the key driver for the KSE- index. Moreover, sa table exchange rate and less likelihood of an immediate currency crisis can entice foreign investors to revisit Pakistan’s case .
The approval of a critical IMF bailout program along with some stability on political grounds and a decline in interest rates has brought liquidity back towards the equity market.
The influx of local liquidity is anticipated to drive momentum in the domestic equity market. The significant reduction in interest rates and the relatively favorable position of equities as an asset class in the current environment will likely attract fresh domestic liquidity.
Moreover, AUMs of the mutual fund industry have witnessed substantial growth, although they remain heavily concentrated in money market funds.
"However, with declining yields and a stable economic environment, we expect a shift from money market funds to equities, which could further support a re-rating of the domestic bourse," it noted.
The stability of the local currency and the strong performance of the domestic equity market are expected to attract interest from foreign investors.
Over the years, the share of foreign investors in the local market has declined significantly.
Notably, between FY18 and FY23, foreign portfolio investments (FIPI) recorded an outflow of US$1,613mn.
However, in FY24, FIPI registered an inflow of US$141mn, likely driven by improved macroeconomic indicators and political stability.
The report believes that the local bourse will continue its impressive run in CY25, driven primarily by a degree of stability on the economic front and the anticipated influx of domestic liquidity, which has remained sidelined in recent years due to uncertain economic conditions & high interest rate environment.
Traditionally, real estate, gold, and U.S. dollar have been the preferred asset classes for the masses in Pakistan.
The increase in tax rates, coupled with a property ownership threshold triggering additional tax measures, significantly drained liquidity from the real estate sector.
As a result, equities will remain the preferred asset class in the foreseeable future, especially when the market is still trading below its historical multiples.
Adherence to IMF requirements and implementation of necessary structural reforms will be a critical differentiating factor between good and great performance of the KSE-100 Index.
Copyright Mettis Link News
Posted on: 2024-11-27T19:40:08+05:00
