Political noise may hit fever pitch

Political noise is expected to hit fever pitch this week but clarity should emerge, one way or the other. The political clarity feeding into macro clarity is going to be the key to market fortunes and return of the broad-based investors’ sentiment, especially with the negotiations with the International Monetary Fund (IMF) are in progress and increasing pressures from the international commodity prices.

We reiterate our liking for banks, E&Ps and fertiliser, where a combination of growth stories with dividend yields are on the offer and continue to be solid bets till the clarity emerges.

The KSE-100 Index’s last meaningful rally was witnessed post-Covid lockdown scenario when opening up of the economy and packages announced by the government and the State Bank of Pakistan (SBP) boosted the economic activities, reviving investors’ confidence.

The benchmark index rose 70 per cent from 27,200 points on March 25, 2020, reaching to over 45,700 points by March 2021. However, in the last one year, the index has been trading in a narrow range of 6,000 points (13 per cent), reporting a negative performance of 5 per cent YoY, over the economic and political uncertainties.

Of the eight stocks in the KSE-30 that met the 15 per cent return benchmark, six stocks (Engro Fertiliser, Engro Polymer, Fauji Fertiliser, United Bank Limited, Mari Petroleum and Millat Tractors) delivered a double-digit dividend yields.

However growth stories have also been amply rewarded as visible with the Systems Limited and Meezan Bank. The yields in isolation have not delivered outperformance where a number of notable yield players; Pakistan Oilfields, Engro, Hubco and MCB Bank, fell short of the 15 per cent total return mark.

Returns have not been similar within the same sector. Tech stocks are a case in point with two stocks making it in both the top 10 and bottom 5 of the KSE-30. The banks within the KSE-30 also depict a wide return range from -6 per cent to +39 per cent (the range expands to -16 per cent to +59 per cent if all the banks in KSE-100 are included). There are some broad-based results too, where most domestic demand/cyclical plays feature in lower half of the table, while three of the bottom five performers are refineries. Urea producers delivered more consistent positive performance.

Expanding the analysis to outperformers among the KSE-100 constituents, the broader insights remain relatively the same with the 23 outperformers boasting of seven banks, three fertiliser, two chemicals, two autos and one oil and tech play each.

However, notable difference versus the KSE-30 is textile and real estate, hospitality (both not represented in the KSE-30) and a couple of names with the stock-specific stories but their weight in the index remains small.