Pakistan’s market has recovered sharply in the last few months, with the benchmark KSE-100 up 52% from its level of 41,453 on Jun 27, 2023, and 64% from its recent low of 38,342 on Jan 17, 2023. Better than expected IMF Stand By Agreement (SBA) in Jul-2023, followed by the successful completion of the first IMF review, a stable currency, and the announcement of elections, helped improve investor sentiments. However, the recovery in share prices has been faster than our expectations.
This sudden recovery in prices has been accompanied by significant improvement in volumes, with average traded value in the ready/cash market improving to around Rs14bn/day (US$49mn) in 2H2023 vs Rs6bn/day (US$20mn) in 1H2023. Interestingly, in the last two weeks, volume and value traded has jumped significantly, with an average daily volume of 1.3bn shares and a value of Rs31bn/day.
As a result of this substantial increase in share prices and abnormal trading activities, the official reported leverage (Futures Open Interest, MTS, and MFS) has also substantially increased to a around 2-year high of Rs40bn.
Last time levels were at this level was on Sep 27, 2021, at Rs46bn. This time, share financing rates are 30% while 2 years back when financing was at record high the rates was near 10%.
This high leveraged buying at higher rates ahead of year end has generated margin calls, which caused the market to fall 3.64% today.
Although absolute leverage position is at record high but in relative terms this is not a big risk. Current leverage is 1.6% of the market’s Free Float capitalization and 0.4% of the market’s Total capitalization. In last 3-years (2020-2022) these ratios averaged at 1.2% and 0.4%, respectively.
Open Interest Futures: Open Interest in single stock futures has increased to Rs24.8bn from Rs14.3bn in end of Jun-2023. This is highest since Sep-2021. Average annualized spread yesterday was at 30%. In few stocks it was at 33%.
Margin Trading System (MTS): Leverage has shot up to Rs9.2bn, which is also 2-year high. The last few days have also seen average MTS rate shooting up to around the cap rate of 30% mark from its recent low of 18.04% on Jan 02, 2023.
It is also surprising as 6M KIBOR has come down over the past few months, with the spread between the MTS rate and 6M KIBOR rising to 8.6% vs. 10-Years average of 2.5%.
Margin Financing System (MFS): MFS value stood at Rs6.1bn, not seen since Sep-2021.
Interestingly, short position in futures have not increased substantially in absolute terms. Short position stood at Rs1.7bn as of Dec 18, 2023, compared to Rs0.6bn on Sep 27, 2021 as per PSX data.
The increase trend in leverage is somewhat concerning for the market in the near-term in our view. Normally many lenders don’t lend before Dec closing thus increasing rates to new high.
The trend suggests high demand for leverage with relatively limited liquidity. Generally speaking, if the rate goes higher or if leverage is not available, than investors will look to offload positions.
In spite of recent stock market recovery, Pakistan continues to trade at a big discount to regional indices. Pakistan is now at 66% discount to MSCI EM PE of 14.9x and at 49% discount from MSCI FM PE of 9.9x.
Pakistan market currently trades at 2024E P/E of 3.6x compared to historical long term average PE of 8x. Dividend Yield of our sample companies is 10% on an average for 2024E which is above the last 10-Years average of 7%. Similarly on price to book value (PBV) listed firms of Topline sample is 0.8x compared to last 10-Years average of 1.2x.
Pakistan’s market capitalization to GDP is near all time low of 9% which is almost half of last 10 year average and far lower than regional countries. Thus having lot of potential to grow.
We like cyclical sectors including Cement and Steel due to expected decline in policy rate and better volumetric sales. We also like Banks due to 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).
Courtesy – Topline Pakistan Research