Pakistan’s market performance in 2023 will continue to remain dull mainly due to Pakistan’s external debt repayment crisis and increased political noise ahead of the general elections.
According to Topline Securities, the index may clock in as high as 47,000 generating a 14 percent return which is not attractive when compared to fixed-income securities.
Pakistan’s external debt obligations are in excess of US$73 billion for the next 3 years (FY23-25) as compared to prevailing low FX reserves of US$6-8 billion. The report says there is an urgent need for debt restructuring and a much bigger IMF program in 2023. This will be accompanied by tough exchange rates and tighter monetary and fiscal measures. These developments will likely have implications for the stock market in 2023.
Political noise is also anticipated to remain elevated during 2023 ahead of General Elections scheduled in October 2023. Though opposition leader, Imran Khan, head of Pakistan Tehreek-e-Insaaf (PTI), is continuing to push for early elections there are few experts who are also expecting one year delay in elections due to the economic crisis. Developments on the election and its timings will continue to affect market sentiments in 2023, the report added.
Given the challenging macroeconomic scenario and rising political noise, the Pakistani market will continue to trade at low valuations with a PE of close to 4x. The market currently trades at a 2023 PE of 3.2x (4.5x ex circular debt and Govt. banks). This valuation is in-line with what happened in 1998-99 where the market on average traded close to PE of 4x post Nuclear Tests sanctions followed by debt restructuring. Few countries like Srilanka, Zambia, and Ghana are undergoing debt restructuring trades at PE of 2-4x.
In the best-case scenario, if crude oil prices fall sharply and the global credit market improves, equities may perform better than expected. Similarly, in the worst case, if Pakistan defaults on its debt payments then a fall can be expected in 2023. High-quality non-cyclical stocks with a stable business that will gain from the weak Pakistani Rupee and high-interest rates should be preferred in 2023.
The report earmarks selected stocks in the Banking, E&Ps, Fertilizer, and Technology sectors. Top picks for 2023 include Meezan Bank (MEBL), United Bank (UBL), Mari Petroleum (MARI), Pakistan Oil Fields (POL), Lucky Cement (LUCK), Engro Fertilizer (EFERT), Systems Limited (SYS) and Interloop Limited (ILP).
