Staff Report:
Fueled by economic stability and fiscal consolidation, Pakistan Stock Market (PSX) is set to touch 127k by Dec 2025, suggesting return of 37% including dividend yield of 10%.
We expect re-rating in PE primarily on the back of improving macro indicators and falling bond yields which is flushing more liquidity in equities, thus helping current low PE to march towards its historic forward PE of 7x during current IMF program. We expect market forward 2026 PE to reach 5.75x from current level of 4.6x by Dec 2025.KSE-100 Falls 283 Points Amid Volatility
During 2025, key drivers for the market would be (1) successful completion of IMF review and passing of FY26 budget in line with IMF guidelines, (2) credit rating upgrade for Pakistan, subsequently opening the doors for launch of Eurobonds and Sukuks, (3) Pakistan relations with new USA government and (4) successful privatization of any bleeding SOE i.e. PIAA, DISCOs alongside materialization of Reko Diq deal.
As a result of falling returns on the fixed income instruments, the mutual funds have remained net buyers of US$138mn in last 2 months in equity market. We expect this conversion from fixed income to equities to continue as 1 year Sukuk and T-bill is now yielding 10.99% and 13.1% which is almost half of the yields seen 1 year ago.
On Economy side, external indicators are gradually improving on the back of contained import growth and strong momentum in inward foreign workers remittance. As a result of this we expect FX liquid reserves to cross US$13bn mark by Jun 2025, covering ~2.8-3x of monthly imports.
We expect inflation to average around 7-8% during FY25 after posting 23.4% in FY24. Inflation is receding sharply owning to lower food prices and negative fuel costs adjustments. As a result, we expect policy rate to clock in at 11-12% by Dec 2025 from current level of 15% and peak of 22% in Jun 2024.
We expect modest growth of 2.5-3.0% in GDP in FY25 on the back of muted agriculture growth of 1.0%. Agriculture growth may remain lower on the back of expected decline of 8% in major crops due to poor outlook of wheat and cotton crop. While, services segment is expected to deliver 4.1% growth followed by industrial segment growth of 2.3% in FY25.
Top Sectors: We believe, amidst falling interest rates, receding inflation, and stable currency, the consumers; both discretionary and staple, and Pharma stocks will witness expansion in both margins and volumes. Alongside this, due to improved recovery ratios in E&Ps after the gas price hikes, we anticipate E&Ps valuation to revert to their mean of 7-8x gradually from current level of 4-5x (OGDC and PPL mainly). Furthermore, companies trading at higher valuation gap or discount to their SoTP value are also expected to converge to their historic valuations/multiples.
Top Picks: Based on the above theme, we like OGDC, PPL, MEBL, FFC, LUCK, HBL, SYS, PSO, SAZEW, AIRLINK, and NML from our universe. While in Alpha stocks, we prefer COLG, PKGS, SEARL, AGP, MUREB, and AICL.
