New govt’s policy to be key market sentiment driver

The domestic political space has created a lot of buzz in the last few months. While the opposition, with a simple majority managed to oust Prime Minister Imran Khan. Following his oath-taking ceremony, Premier Shehbaz Sharif, in his opening speech, announced new measures to the likes of augmented minimum wage at Rs25,000/month, 10 per cent increase in the federal government employees salary from April 1, 2022, Benazir card to become functional again, laptop scheme for students, and high electricity prices to be addressed.

However, some of the decisions announced in the opening speech have been put on hold and will be reviewed in the upcoming budget. Moreover, working days for banks have been increased to six and all the government officials/bankers have been asked to work longer hours.

We believe the key sentiment driver for the market will be immediate policy formation by the new government. An immediate task that needs to be taken up is foreign exchange reserves management. For that, primary focus should be on negotiations with the International Monetary Fund (IMF). Besides, as per the media reports, Chinese rollover, amounting to $2.4 billion is expected as early as next week, while Pakistan is also expecting some foreign inflows as a safe deposit from friendly countries.

The new government kept petroleum prices unchanged. However, this subsidy on petroleum products and power tariff may have to be reconsidered. The government needs to prepare a budget in a matter of 35 to 40 days, with the primary focus on revenue mobilisation and curtailment of expenditures, while also supporting lower strata of population. In addition, several IMF conditions needs to be incorporated in the upcoming budget.

The main focus should be on exports and the new government should have dedicated targets for exports. The IT sector, while already thriving, should further be explored. Also, luxury and non-essential imports should be discouraged and curtailed immediately. The currency should be allowed to remain at its market determined level. Moreover, initiatives for overseas Pakistanis such as Roshan Digital Account (RDA) should be prioritised (inflows of $4.1 billion as of April 2022) and proper channel flows for remittances should be maintained to keep foreign reserves afloat.

The expected hike in gas prices will need to be implemented after the recently passed WACOG bill. Not only will this put a lid on future gas circular debt accumulation, it will also relieve the government’s fiscal outflows by incorporating liquefied natural gas (LNG) into the local gas sales price mix. The new government should ensure that it protects the lower income strata of the society by finding an ideal mix of gas prices, while also meeting the revenue requirement of gas utilities.

We traced back market performance from 2013 to-date and observed that every single time the index dipped nearly 10 per cent or more, the market multiple remained much higher a, compared with the current multiple. Some key events include outbreak of the Covid-19 in early 2020 (PER of 7.2x), Pakistan-India border tension in early 2019 (PER of 8.1x) and the last interest rate hike and rupee depreciation during the end of 2018 (PER of 8.8x). Whereas the market is currently trading at a trailing PER of 4.6x; whereby, we do not foresee any major downside in the index.

The KSE-100 is currently trading at a PER of 5.0x (2022), compared with the Asia-Pacific regional average of 11.5x, while offering a dividend yield of 8.3 per cent versus 2.6 per cent offered by the region.