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In the middle of every difficulty lies opportunity!

By Khurram Shehzad

Pakistan Equities are trading at historic lows/deep discounts to Asia Region!

As per data of the world’s Top-10 worst equity markets, PSX stands as the worst-performing market so far with well over 20 percent decline YTD19; for reasons that have massively overplayed at the domestic equities. From a common perspective, for instance, its geopolitics, on-going demand compression in the economy, rising overall costs to businesses and individuals, in terms of increased taxes, inflation, and interest rates, with volatility/decline in currency parity, given vulnerability in the external account due to tight forex position and so on.

Okay, mostly true, but the view revolves around the immediate economic impediments in the wake of corrections (Difficulty) that have been embarked on by the current setup, so the PSX has seen one of its worst performances in the last one year, where the total value has eroded to under US$40 billion, from near a US$100 billion mark at its peak.

However, at the same time, from the rare opposite perspective, PSX is becoming the most attractive equity market in the world too (Opportunity) for a medium to long term investment horizon, let’s give it a perspective:

If we look at the relative regional perspective (Pakistan versus Asia) provided in the (comparative table, PSX is trading at a historically low PE multiple (2020F) of 4.4x earnings (most of the companies under the KSE100 benchmark are trading even below their Book Values!).

Pakistan equities: Relative position

The discount on the offer on key multiples is unprecedented; that has hardly been seen in decades before i.e. 70 percent on PE, 65 percent on DY, and, most appealing of all, after adjusting for earnings growth, the PE/EPS-Growth is at the lowest at 0.27x versus the average 1.14x!

Historically, PSX’s average discount on PE to the region hovered around 40 percent, and towards 50 percent, only in worst circumstances. So, adjusting the current discount to historical average of about 40 percent, the KSE100 Index should appreciate the benchmark by at least 30 percent from current levels!

Even for 2019E, PE multiple of PSX is at 5.2x with almost similar deals on the offer.

PE/EPS-Growth ratio indicates Pakistan equities are available almost for free, i.e. 0.2x, even after adjusting the growth of the listed corporates 1-year forward.

The interesting fact is, earnings growth of the listed corporates still runs in the double-digit i.e. 16.2% for 2020, despite so much talk of the expected decline in earnings ahead.

The reason could be the essential hedge that some of the heavy-weight listed sectors provide against currency and interest rate movements with relatively inelastic demand dynamics i.e. Oil& Gas, Power, Textiles, Tech, Banks etc.

Therefore, the key multiples mentioned here essentially reflect/incorporate almost all the developments taken place so far on the political, economic and sectorial fronts with even the negative sentiment that has significantly overplayed at the moment, despite macro stability with various fundings in place now, followed by some currency stability and a better outlook on the external front, alongside much-needed efforts being done on the fiscal side of the economy.

Realization of the highly undemanding valuations that the PSX offers at the moment requires a strong narrative of a Positive Outlook given the hard reforms being done with challenging tasks being taken up on the fiscal front.

It is indeed about telling a story of how the hard actions today are going to benefit the entire country, its economic growth and overall sustainability ahead.

Clearly, till that happens and the gaps narrow, one needs a revisit at the PSX to see almost everything is on sale at the moment due to sheer ignorance of investors while selling in panic and haste only in search for the fixed risk-free returns that seem to have peaked out with the world turning towards softer monetary policies as commodity demand tapers off.

In all of that, the traction PSX provides is unprecedented as the numbers speak for themselves with every decline, calling out to only brave for a lasting visit!

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