After many uncertainties, Pakistan Elections are all set for February 8, 2024, to elect representatives for the National and Provincial Assemblies for the next five years (2024-2029). Many political experts were unsure about timely elections a few weeks back due to legal, operational, and weather-related issues. It seems all these issues have been settled, and the process will likely be completed on time.
Our detailed strategy note titled ‘Stock Market Recovery Has Just Begun; Index Likely to Reach 75k in 2024,’ dated November 18, 2023, mentioned that things are now looking stable, and elections are likely to happen on February 8, 2024, contrary to earlier fears that elections may be delayed for a few years.
A smooth power transfer to an elected government will help overcome concerns of bilateral and multilateral lenders, including the IMF, when Pakistan is facing a severe external debt repayment challenge.
In its country report in July 2023, IMF stated that the new Stand-By Agreement (SBA) can play a crucial role in anchoring policies ahead of the national elections due in the fall and until a new government is formed. IMF team also met with leaders of major political parties in Pakistan to get assurances of support for key objectives ahead of final approval of US$3bn SBA in Jul 2023 crucial to save the country from default.
With only 2 weeks left for the Elections, political activities and election campaigns are not what they used to be. This could be due to political parties’ lack of interest or lesser competition in most constituencies after PTI did not get the “Bat” symbol.
Looking at the manifestos and promises of major parties, it seems no one is addressing the key economic challenges Pakistan faces. Most parties focus more on popular measures to gain public confidence amid record-high inflation.
Comparing the performance of 3 large political parties in their last tenure, PML-N and PTI have performed relatively well on key economic indicators against PPP. This has also been endorsed by a recent news analysis by Bloomberg, where as per the Misery Index, PML-N (score of 14.5%) has a better record on managing the economy, followed by PTI (score of 16.1%) and then PPP (score of 17.2%).
Considering the recent developments, the question investors are interested in is not who will win the elections but whether the new government will get a majority or if it will be a weak coalition government. As reported by leading political experts, it looks like PML-N will form a new coalition government. This is also supported by few recent surveys.
We think that if one party gets 50% plus seats, that will boost investors’ confidence, and markets will react positively. This will also give a positive signal to the IMF and other lenders. On the contrary, a coalition government with support of smaller parties will remain fragile and may struggle to implement the much-needed economic reforms.
Another key area to look for is how the new government will manage economic challenges, especially to deal with the IMF for a long-term program. Considering the not-so-pleasant experience with the PML-N nominated Finance Minister in the last opposition-led government of PDM, investors are eager to see the finance team of the new government.
The new government and its Finance Minister can play a significant role in negotiating with friendly countries for debt rollover/debt re-profiling and finalizing a new IMF program that requires a lot of painful reforms.
Furthermore, evaluating the new government’s relationship with the establishment will be interesting. Pakistan has a poor history of worsening civil-military relationships that have badly affected the political continuity, with negative implications for the economy and the markets.
Pakistan’s Stock market recovery is likely to continue in the year 2024. We expect the benchmark KSE-100 total return index to reach 75k by Dec-2024. However, this is based on current low PE multiples without assuming any re-rating amid a high risk of debt sustainability. We may also see a post-election rally in line with historical trends.
Smooth transfer of power to new government after elections, new long-term funding program from IMF, and expected fall in Interest rate will be the key drivers of equities in 2024.
In spite of the recent rally, the Pakistani market is currently trading at a PE of 3.7x based on 2024 estimated earnings. This is far lower than the last 5-year and 10-year average PE of 6x and 8x, respectively. This is even lower than countries that have defaulted on external debt.
We like high-quality private sector companies with strong cash flows. We prefer cement and steel in cyclical sectors due to the expected decline in policy rates and better volumetric sales. We also like Banks due to their unmatched valuation.
Our 2024 Top Picks include Meezan Bank (MEBL), United Bank (UBL), MCB Bank (MCB), Mari Petroleum (MARI), Lucky Cement (LUCK), Maple Leaf Cement (MLCF), Fauji Cement (FCCL), Engro Corporation (ENGRO), Pak Elektron (PAEL), Indus Motors (INDU) and Interloop (ILP).
On the other hand, some mid and small caps have the potential to provide above-average gains includes Pakistan Aluminium Beverage Cans (PABC), Mughal Iron & Steel (MUGHAL), Image Pakistan (IMAGE), Tariq Glass (TGL), Century Paper & Board (CEPB), Panther Tyre (PTL), and Murree Brewery (MUREB).
Courtesy – Topline Pakistan Research