PML-N victory to bode well for the market, predict analysts

By Kazim Alam, The Express Tribune

KARACHI: By all means, the benchmark Karachi Stock Exchange (KSE)-100 index reaching an all-time high level of 20,244.8 points on the first day of post-election trading is a vital endorsement of the Pakistan Muslim League-Nawaz (PML-N) victory in the nationwide polls. After all, the PML-N is the party that initiated the far-reaching process of privatisation in the banking sector of Pakistan during the early 1990s, which was followed by a comprehensive petroleum exploration and production policy framework during its second stint in the government (1997-99).

According to Foundation Securities, a brokerage firm, a simple majority of a political party that is generally considered pro-reform, pro-liberalisation and friendlier towards the indusial sector is likely to bode well for the equity market. “The market reaction is likely to be positive on the initial results, as it was bracing itself for a hung parliament and the possibility of delay in tough decisions on key issues. The market has delivered on average 6% return in its post-election rally. Our top picks are OGDC, MCB, PSO, and Lucky and Hubco,” said Mohammad Fawad Khan of Foundation Securities in a note issued to investors.

However, Khan said key challenges require tough decision-making on the economy, energy crisis and law and order situation. In particular, a looming crisis of balance of payment and the pending decision on Pakistan’s re-entry into an IMF programme are some of the key challenges facing the incoming government of Prime Minister-elect Nawaz Sharif. “Near paralysis on key policy decisions has shrunk the cushion for exercising different options, making re-entry into the IMF programme a most likely option for managing debt repayments and current account deficit,” Khan said.

The PML-N has traditionally enjoyed strong ties with Saudi Arabia and other Middle Eastern countries, he said, and can possibly use its leverage to win a deferred oil payment facility for oil imports. “Foreign exchange reserves with the central bank are quoted at $6.5 billion, or less than two months of import cover, which can slip below the $5.5 billion mark by June,” he added.

In its research report on Monday, Shajar Capital, an investment bank, said the market has warmly welcomed the election results and recommended that its investors should take exposure in cement stocks, namely Lucky Cement, DG Khan Cement, Fauji Cement Company, Maple Leaf Cement, Kohat Cement and Charat Cement Company. It also asked its clients to invest in power companies – such as HUBCO, KAPCO, Nishar Power, Nishat Chunian Power – and oil and gas stocks, namely OGDC, PPL and POL. Textiles and oil marketing companies are also a favourite of Shajar Capital in the post-election scenario.

Furqan Punjani of BMA Capital, a Karachi-based brokerage house, believes that the PML-N has solid credentials of a liberal and pro-manufacturing party. “The PML-N’s track record of manufacturing growth during its last two tenures, and resultantly impressive real GDP growth, justify optimism,” he said. The average manufacturing growth in the last two tenures of the PML-N stood at 6%, compared to 2.6% in the last three tenures of the PPP government. Led by the handsome manufacturing growth, the average real GDP in the tenures of the PML-N grew by an average of 4.6%. “The party has strong political relationship with the Middle Eastern countries, whereas it is also known for favouring friendly ties with India.”

Nurali Barkatali of KASB Securities, a brokerage house based in Karachi, believes that the PML-N’s policy framework has been “pro-masses and pro-business” during its previous terms. Going forward, KASB Securities expects a positive market reaction, as the complications of coalition politics have seemingly been avoided. “We reiterate our strategy of keeping the IMF programme as the key theme for stock picks. We highlight energy (PSO, Kapco, PPL, OGDC), banks (MCB), cements (Lucky and DGKC), fertilisers (Engro) and autos (PSMC) could garner special interest in the near term,” he said.

Published in The Express Tribune, May 14, 2013.

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