The Pakistan Stock Exchange’s (PSX) benchmark KSE-100 index is expected to rise around 30% over the next 13 months to hit a record high of 75,000 points in December 2024, signaling that stock prices of the 100 larger companies will reach new heights.
In its comprehensive report titled “Stock market recovery has just begun – index expected to reach 75,000 in 2024”, Topline Research said that “the smooth transfer of power to the new government after the elections, the new financing package “The IMF’s long-term outlook and the expected decline in interest rates will be the main driver of stocks in 2024.”
The index has climbed 44%, or 15,750 points, over the past four and a half months and reached an all-time high of 57,751 on November 16 after the IMF granted a $3 billion loan package and that the first review was successful.
The research house said the expected cut in the policy rate was a major factor likely to provide liquidity to stocks. “With clear signs of economic stabilization, we expect the State Bank of Pakistan (SBP) policy rate to decline by 7% in 2024 to reach 15% by December 2024.”
The February 2024 elections will also bring much-needed political stability. “Based on an initial assessment, there is a good chance that the PML-N and its coalition partners will secure the highest number of seats in the election.”
Vulnerabilities in Pakistan’s external account can only be effectively addressed through a new, larger IMF program, the statement said. “We expect the new government to sign this long-term program with the IMF in 2024. As a result, we estimate some stability in the PKR, which we expect will average Rs 302 per dollar in 2024 from Rs 280 in 2023 and could reach Rs 324 by December. 2024.”
The research firm said cyclical sectors including cement and steel would lead the potential future rally due to expected cut in policy rate and improvement in volumetric sales. He also expects banks to play an active role in the recovery.
The KSE-100 index is currently at an all-time high due to huge dividend payouts. But share prices for most listed companies remain well below 2017 highs.
Topline argued that prevailing stock prices still remained low on the forward-looking price-to-earnings (PE) multiple matrix, although the index surpassed the previous record recorded six years ago.
Currently, stock prices are hovering around an average forward PE multiple of 3.1, meaning prices are 3.1 times their respective earnings per share (EPS).
The average forward PE multiple over the past five and ten years was 6 and 8. This strongly suggests that there is ample room for potential upside in stock prices, driving the index to 75,000 points next year.
“Our KSE-100 index target for 2024 is based on the targeted forward PE of 3.5 multiples. This is based on the average PE of the last two years when Pakistan’s foreign exchange (foreign exchange) reserves fell below two months of import coverage, affecting the PKR (rupee-dollar parity) and investor sentiment,” Topline said.
Corporate profits are growing at a rapid pace despite economic vulnerabilities. Over the past five years (FY19-23), the average profit growth of KSE-100 companies has remained remarkable at 18% per year.
Furthermore, recent increases in electricity and gas prices will help control the circular accumulation of debt that was affecting the profits and cash flows of listed companies linked to the energy sector.
“Our conservative PE ratio target of 3.5 reflects the fact that Pakistan’s external financing risk will persist despite IMF support and we may not see a revaluation to the long-term historical average PE of 8x. In a best-case scenario, the KSE-100 index can rise above 75,000 if the market reverts to its mean.
Despite the recent stock market recovery, Pakistan continues to trade at a steep discount to regional indices. Pakistan is now at a 68% discount to the MSCI EM PE of 13.4 multiples and 56% to the MSCI FM PE of 9.8 multiples.
Published in The Express Tribune, November 19th2023.