February 06, 2024 (MLN): The record-breaking stock market's benchmark KSE-100 Index may continue its leg higher amid heavily discounted valuations which are expected to add to the optimism surrounding greater political stability after elections, according to experts.

The country is gearing up for two key events, a general election on February 08 and the expiry of an International Monetary Fund (IMF) bailout program in March.

“Investors will watch how soon the new government can negotiate a longer-and-larger loan program with the IMF,” said Ruchir Desai, a fund manager at Asia Frontier Capital in Hong Kong as reported by Bloomberg.

“Very discounted valuations, interest rates peaking out and the prospects for an earnings recovery will add to the optimism surrounding greater political stability,” he added.

Gaining access to a new round of IMF funding is critical to reviving the country’s economy and may help the country secure financing from other creditors such as Saudi Arabia.

The IMF estimates that the country's external financing requirements will average $30bn every year between fiscal 2025 and 2028.

Thus, the external funding gap would require more aid for the fragile economy to meet its high debt obligations.

Pakistan’s benchmark KSE-100 Index has jumped more than 55% in USD terms since the nation reached an initial bailout deal with the IMF at the end of June, the best performer of more than 90 equity indexes tracked by Bloomberg.

The rupee has strengthened about 2% over the same period, beating all its Asian peers, while the price of the nation’s dollar bonds due 2024 has almost doubled from its low in June.

Even after the KSE-100 Index’s rally, the gauge is still trading at a price-to-earnings ratio of just 3.8, which is a discount of 45% to its 10-year average, said Bloomberg.

That is even lower than some countries that have defaulted on their external debt.

“If the new government comes in and successfully negotiates a new IMF program, we may see the Pakistan rupee appreciating, interest rates will come down, and the Pakistan stock exchange will surge back to 10-to-12 times P/E,” said Adnan Sami Sheikh, an analyst at Pakistan Kuwait Investment Co. in Karachi.

Amjad Waheed, chief executive officer in Karachi at NBP Fund Management, which oversees about $820 million said that no matter who wins and who loses the election, the country’s policies going forward will mostly be IMF-dictated.

“We can see some upside in equities. Inflation and interest rates will move downward going forward, which should be good for the bond market as well,” he added.

Any steps taken by the next government to narrow the fiscal deficit will help utilities and oil-and-gas businesses, while initiatives to improve tax collection will boost the overall appeal of Pakistani assets.

Potential future cuts in central bank interest rates once the economy returns to a surer footing can aid cyclical sectors such as materials.

Stock Market Rallies After Polls: History Shows

History shows investing in Pakistan stocks before an election has been a profitable strategy, regardless of the polls' outcome.

Those who bought the KSE-100 Index the day prior to a national election gained an average 7.5% in the month following the past six polls, ever since the KSE-100 index was introduced.

The rally has typically continued, with the gauge advancing 18% on average in the next three months and 20% in the next six months.

“We believe the IMF will consider sitting with the elected government for a longer-tenor program,” said Amreen Soorani, head of research at JS Global Capital Ltd. in Karachi.

“Higher confidence levels would increase the prospects of removing negative sentiment” that is causing the current low multiples in the stock market, she said.

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Posted on: 2024-02-06T12:18:56+05:00