Pakistan stock market attractive on valuation, dividend yield: Chris Wood

Despite the political turmoil and the economic headwinds that the country is facing, Pakistan's stock market appears attractive on account of attractive valuation and high dividend yield, said Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.

“Unsurprisingly, given the current stressed macro environment, both politically and financially, the most attractive feature is low valuations and high dividend yields. Indeed, GREED & fear heard this week from Karachi-based fund managers that the market is at its cheapest level ever based on recorded data,” Wood said on Pakistan's stocks.

The MSCI Pakistan Index, according to Wood's note, is trading on 3.7x forecast 2023 consensus earnings and a 2023 forecast dividend yield of 10.2 per cent. Meanwhile, from a flow of funds perspective, foreign investors have sold a net $2.1 billion worth of Pakistani equities since 2017 when Pakistan was ‘upgraded’ to the MSCI Emerging Markets Index. This, Wood said, was a consequence of Pakistan going from a 9 per cent weighting in the MSCI Frontier Market Index to a minnow in the MSCI Emerging Markets Index (0.1 per cent).

“It is therefore positive that it was returned to the MSCI Frontier Market Index in December 2021 where it now represents only 1 per cent of the benchmark. Vietnam remains a massive 30 per cent of the index,” he said.

In the past one year, Pakistan stock markets have performed relatively better than their Asian counterparts, data show. While the Karachi 100 index has lost around 10 per cent in the last one year, its counterparts such as Shanghai Composite, Hang Seng, Taiwan Weighted and KOSPI have slipped between 21 per cent and 39 per cent during this period.

Meanwhile, India’s frontline benchmarks, the S&P BSE Sensex and the Nifty50, have been clear winners, rising around 2 per cent and 1.25 per cent in the last one year.

A large part of the fall in Pakistan's stocks over the last one year is attributed to the economic, financial and political turmoil in the country, analysts said. A pressing short-term issue, with foreign exchange reserves down to only $7.44 billion, according to Wood, is avoiding a balance of payments crisis. Their domestic economy is suffering with inflation running at 26.6 per cent YoY in October.

In Islamabad this week for the first time ever, and in Pakistan for the first time in four years, GREED & fear, Wood wrote, was pleasantly surprised to hear that the country was not in danger of imminent default as was feared a few months ago. The estimated $30 billion of losses triggered by floods since mid-June, in the era of climate concerns, he believes, has won some goodwill in the form of an ongoing International Monetary Fund (IMF) program, which ends June 2023.

“The word is that a $1 billion bond maturing in December will be repaid. There is also $16 billion of loans from China due to be repaid next year, which it is hoped China will agree to roll over. It is also anticipated that Saudi Arabia will invest $12 billion in an oil refinery in Pakistan. Saudi has agreed to reschedule $2 billion owed in December for another 12 months,” the note said.

That said, Wood suggests that Pakistan's stock market has also been supported, amidst the net foreign selling of recent years, by a growing institutionalisation of domestic fund flows comprising both bank-owned mutual fund companies and insurance companies. Assets of mutual funds totaled Pakistan rupees 1.3 trillion as at the end of September, according to the Mutual Funds Association of Pakistan.