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Pakistan Strategy KSE-100 Posted Highest Return in 7 Years Structural Reforms to Set the Market Tone for FY22

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Pakistan Strategy KSE-100 Posted Highest Return in 7 Years Structural Reforms to Set the Market Tone for FY22 Foundation Research| A Fauji Foundation Group Company Equities REP-095 PAKISTAN Pakistan Strategy KSE-100 posted highest return in 7 years Structural Reforms to set the market tone for FY22 Rising commodity prices and slowdown in growth of remittances as travelling opens up amid rising foreign liabilities would put pressure on PKR and proves to be inflationary in nature, in our view. This along with slow progress on structural reforms would make it difficult for government to continue with its accommodative policies and may force it to introduce further revenue measures and cut development expenditure to bring fiscal discipline. However, in order to comply with the IMF program, structural reforms are to be implemented in true spirit, which would helped the heavy weight sectors i.e Banks, Number of COVID cases drop sharply E&Ps and Fertilizer to Outperform. Subsequently, KSE-100 would continue its rally built on 6,000 strong fiscal and monetary support amid easing COVID cases, in our view. 5,000 Market Depth at high of 13 years 4,000 On the back of proactive response of both government and central bank amid declining cases of COVID-19, KSE-100 closes ~37.6% (46% in US$ terms) up in FY21 against muted 3,000 return of last year. Notably, during the fiscal year Rupee appreciated by 6.6%. The current 2,000 fiscal year started by decline in policy rate to 7% and ended with the growth prone budget for FY22 has significantly improved market depth. Average Daily Turnover (ADTO) has 1,000 notably improved by ~164% YoY to ~Rs19.0bn, at a high of 13 along with improvement in 0 volumes by ~168% YoY to ~524mn shares in FY21. However, improved volumes came with a significant drop in settlement to ~53.2% in FY21, down 689bps YoY. Jul-20 Jul-20 Jan-21 Jun-21 Oct-20 Apr-21 Sep-20 Feb-21 Dec-20 Dec-20 Aug-20 Besides, companies have raised highest ever amount of Rs17.1bn during FY21 through IPO Nov-20 Mar-21 May-21 Source: GoP, Foundation Research, June 2021 with total number of new listings of 7 at PSX, which is high of 11 years. Performance witnessed across the board during FY21 Across the board performance, baring E&P and Tobacco, was witnessed at PSX during KSE-100 Index along with KSE-All volume… FY21. Technology and Cyclical sectors outperformed given fiscal and monetary stimulus for revival of economic growth. Technology, Engineering, Cement and Automobile rose Volume (mn) KSE-100 50,000 2,500 the most with return of 162.5%, 138.5%, 71.7% and 51.8% YoY during FY21. Textile, Chemical, Power, OMC, Banks, FMCG and Fertilizer followed with return of 44.6%, 34.6%, 47,500 2,000 28.8%, 24.8%, 22.3%, 16.8% and 5.8% YoY. However, E&P and Tobacco were the worst hit 45,000 sectors with return of -1.0% and -15.7% during FY21. 42,500 1,500 Individuals and Companies provide exit to FIIs and Banks 40,000 1,000 Individuals and Companies provide exit to Foreigners and Banks during FY21. Individuals 37,500 have bought equity stake worth of US$332mn followed by ~US$142mn and ~US$35mn of 500 Companies and Others. However, Foreigners, Banks and Brokers reduced their exposure 35,000 by ~US$395mn, US$101mn and ~US$33mn. Insurance too reduced their exposure by 32,500 - ~US$7mn against buying of US$128mn during FY20. Foreigner’s to remain on selling spree Jul-20 Jan-21 Jun-21 Oct-20 Apr-21 Feb-21 Sep-20 Dec-20 Aug-20 Nov-20 Mar-21 May-21 Source: PSX, Foundation Research, June 2021 Continuation of FATF grey list along with looming threat of moving to MSCI FM markets would keep the foreigners at bay, in our view. MSCI starts consultation with market participation on the reclassification of Pakistan to FM market as no Pakistani company Analyst meets EM Size and liquidity criterion. Notably, Foreigners reduced exposure in Pakistani Muhammad Awais Ashraf, CFA +92 21 35612290 equities by ~US$2.2bn during last six year. [email protected] EXT: 338 Prefer defensive and beneficiary of reforms We advise to go long on sectors that are beneficiary of structural reforms, rising commodity prices and gov’t growth policies. We have our liking for E&Ps, Banks, Fertilizers, Foundation Securities (Pvt) Ltd. OMCs and Conglomerates. We prefer OGDC, PPL, MCB, HBL, MEBL, PSO, MARI, LUCK, FFC, Wednesday, June 30, 2021 FFBL, ASTL, ISL and APL. Please Refer to last page for important disclosures and analyst certifications www.jamapunji.pk Pakistan Strategy July 1, 2021 Fig 1: Majority of the events turned in favor of KSE-100 Index during FY21 ADTO (RHS, Rs bn) KSE100 (LHS) FATF decides to maintain Pakistan in Opposition forms IMF-Pakistan Pakistan issued grey list 50,000 Remittances hit Increased new reaches staff level US$2.5bn Euro 40.00 PDM alliance to IPPs received record high of oust Gov't COVID cases agreement bonds first trance US$2.8bn due to second 35.00 45,000 wave 30.00 Gov't announced 40,000 FY22 budget 25.00 20.00 MSCI proposes Pakistan records 35,000 Global market rally on to reclassify 15.00 5th consective US elections results & Pakistan into current account Inflations falls Pifzer vaccine results FM to 5.7% in MSCI added LUCK/TRG 10.00 30,000 announcement surplus Jan'21 in small/mid cap 5.00 25,000 - Jul-20 Jan-21 Jun-21 Oct-20 Apr-21 Sep-20 Feb-21 Dec-20 Aug-20 Nov-20 Mar-21 May-21 Source: PSX, Foundation Research, June 2021 Fig 2: Despite negative return of 1.1% in June Fig 3: …market posted return of 37.6% in FY21 Rs Return US$return Rs Return US$return 20% 60% 40% 10% 20% 0% 0% -20% -10% -40% Jul-20 Jan-21 Jun-21 Oct-20 Apr-21 Sep-20 Feb-21 Dec-20 Aug-20 Nov-20 Mar-21 FY12 FY15 FY16 FY20 FY13 FY14 FY17 FY18 FY19 FY21 May-21 Source: PSX, Foundation Research, June 2021 Source: PSX, Foundation Research, June 2021 Fig 4: Historic high monthly volumes of 911.7 witnessed in Jun'21 Fig 5: Taking overall volumes to historic high as well during FY21 1,050 600 950 850 500 750 400 650 10-years average 237mn 550 300 450 350 200 250 150 100 50 0 Jul-20 Jan-21 Jun-21 Jun-20 Oct-20 Apr-21 FY16 FY18 FY20 FY12 FY13 FY14 FY15 FY17 FY19 FY21 Sep-20 Feb-21 Dec-20 Aug-20 Nov-20 Mar-21 May-21 Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021 2 Foundation Securities (Pvt) Limited Pakistan Strategy July 1, 2021 Fig 6 : ADTO improved by 10% on MoM to Rs23.5 bn Fig 7: taking overall ATDO to 13 years high US$ (PkR bn) (US$ mn) PkR 160 Rs bn (LHS) US$ mn (RHS) 25.0 190 32 140 170 27 20.0 150 120 130 22 100 15.0 110 17 80 90 10.0 70 12 60 50 40 7 5.0 30 20 10 2 0 - Jul-20 Jan-21 Jun-21 Oct-20 Apr-21 Sep-20 Feb-21 Dec-20 Aug-20 Nov-20 Mar-21 May-21 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021 Fig 8 : FIIs remains on the selling for sixth cosecutive year Fig 9 : Insurance sold the most during Jun'21 400 FY20 FY21 60 May-21 Jun-21 300 40 200 100 20 0 0 (100) (200) (20) (300) (40) (400) (500) (60) Ins. FIPI Ins. Ind. FIPI Ind. Banks Banks Comp. Comp. Others Others Brokers Brokers M. Fund M. Fund Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021 Fig 10 : Goods import rise to FY18 levels (US$ mn) Fig 11 : … as Real Interest Rates already in negative territory RIR CPI Interest Rate 6,000 Imports of Goods FOB 17% 5,500 5,000 12% 4,500 4,000 7% 3,500 3,000 2% 2,500 2,000 -3% Jun-19 Jun-20 Jun-18 Sep-18 Sep-19 Sep-20 Dec-18 Dec-19 Dec-20 Mar-21 Mar-18 Mar-19 Mar-20 FY06 FY07 FY08 FY13 FY14 FY19 FY20 FY21 FY03 FY04 FY05 FY09 FY10 FY11 FY12 FY15 FY16 FY17 FY18 Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021 3 Foundation Securities (Pvt) Limited Pakistan Strategy July 1, 2021 Fig 12: KSE-100 among worst performers… (MTD %) Fig 13: as FII trimmed their stake by US$32 mn Taiwan India Philippines Indonesia Korea Sri Lanka Vietnam Pakistan Indonesia Philippines India Vietnam Hong Kong Malaysia Singapore Thailand China S. Korea Pakistan Japan Malaysia Taiwan Thailand 0 500 (500) 1.0% 2.0% 0.0% 3.0% 1,000 1,500 2,000 -4.0% -3.0% -5.0% -2.0% -1.0% (1,000) (2,000) (1,500) Source: Bloomberg, Foundation Research, June 2021 Source: Bloomberg, Foundation Research, June 2021 Fig 14: KSE-100 index ranked 4th in FY21 Fig 15: … despite FIIs outflows Korea India Taiwan Japan India Sri Lanka Pakistan Pakistan China Indonesia Singapore Vietnam Indonesia Philippines Hong Kong Malaysia Thailand Thailand Philippines Taiwan Malaysia S. Korea Vietnam 0 0% 20,000 40,000 10,000 30,000 (10,000) (20,000) 20% 40% 60% 80% -40% -20% Source: Bloomberg, Foundation Research, June 2021 Source: Bloomberg, Foundation Research, June 2021 Fig 16: KSE 100 provides impressive growth at low PE Fig 17: … Cheaper on PB as well 21 3.2 3.0 18 2.8 India PER (x) 2021 (x)PER India Indonesia Philippines 2021 (x)P/BV Taiwan 2.6 Regional Avg.
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