Pakistan Equity| Strategy Jul 2, 2018 REP-057 AC Nabeel Khursheed Best Local Brokerage House [email protected] Brokers Poll 2011-14, 2016-17 Tel: +9221-35303330 Topline Securities, Pakistan www.jamapunji.pk Best Local Brokerage House 2015-16 Table of Contents Executive Summary ------------------------------------ 3 Election Outcome - Who Will Form the Next Government? ------------------------------------ 5 Pakistan’s Parliament Structure and Past Elections ------------------------------------ 20 Top Three Political Parties of Pakistan ------------------------------------ 28 5-Year Performance of Top 3 Political Parties ------------------------------------ 51 Politics of Electables and Political Engineering ------------------------------------ 69 Past Coalition Governments and Market Reaction ------------------------------------ 74 Appendix ------------------------------------ 78 PakistanHonda Atlas Politics Cars (HCAR) 2 Executive Summary . Pakistan will be gearing up for its second consecutive democratic government transition later this month. Observant and political experts term the upcoming polls (on July 25, 2018) as one of the most toughest and tightly contested elections in Pakistan’s history. Based on our analysis, we believe that there will be a neck to neck contest between PML-N and PTI. However, there is 75% probability that the new coalition Govt. will be led by PTI along with independents and smaller parties. Since it will be a close contest, there is a 25% likelihood that PML-N forms a coalition Govt. with PPP and other parties and independents. In a poll of leading Corporates and Fund Managers, 77% believe PTI to lead the next govt. and were equally split between PML-N and PTI as to who will get the highest number of seats. In another poll of top political experts, 75% of respondents were of the view that PTI will form the next govt. with 71% stating that PTI likely to have highest number of seats. In Gallup’s last National Polls conducted in Mar 2018, PML-N remained the favorite among the public with 36% popularity followed by PTI with a popularity of 24%. PML-N popularity before 2013 poll was 41% and PTI 14%. Electables are expected to play an important role in upcoming elections. History suggests that influential and rich candidates from different rural constituencies can significantly impact the final results as party is important in cities while person is key in villages. It is for this reason that PTI has fielded some strong candidates who enjoy popular standing in their respective constituencies. PakistanHonda Atlas Politics Cars (HCAR) 3 Executive Summary . Besides many electables joining PTI, the on-going investigation against key PML-N lawmakers along with news of media censorship will also help PTI. International media and PML-N are also criticizing it and terming it political engineering. Some sections of media are deliberating whether corruption cases against Nawaz Sharif and his family could lead to sympathy among voters. While PML-N gaining sympathy votes cannot be ruled out in the general elections of 2018, we believe that it may not drastically alter our forecast of PML-N winning 80-90 seats. We do not anticipate religious parties to post major threat in upcoming 2018 general elections despite their announcement to unite under the banner of Muttahidda Majlis-e-Amal (MMA). This is because, contrary to perception, except for 2002 elections, religious parties did not gain more than 5-6% of seats. Though in a coalition Govt., making rules will be difficult but looking at past trend, we conclude that the economy of Pakistan and stock market have no correlation with the structure of the Govt. (whether majority or coalition). Based on our analysis and taking cue from our poll of market participants, we estimate Pakistan KSE-100 index to go as high as 48,000 in case of PTI led Govt. while the index may go up to 50,000 if PML-N leads. The reason for a post elections rally will be political stability and Pakistan’s likely entry into an IMF program. Lower upside of the index in case of PTI is owing to uncertainty over its economic policies while in case of PML-N, market is expected to show higher level of confidence. PakistanHonda Atlas Politics Cars (HCAR) 4 Election Outcome - Who Will Form the Next Government? Pakistan Politics 5 Corporate, AMCs & HNWIs Poll Suggests PTI to Lead The Govt. Pakistan Politics 6 Top Political Experts Eye PTI Led Govt. Pakistan Politics 7 PML-N Favorite Among Public as Per Gallup National Survey Pakistan Politics 8 PML-N Favorite Among Public as Per Gallup National Survey Public Poll: Voting Intentions between 2014 and March 2018: Top 3 Parties 50% PML N PTI PPP PML N, 42% 43% PML N, 38% PML N, 38% PML N, 35% PML N, 36% 35% Gallup Pakistan National Political Opinion Polling (Sample Size N 2000, 28% PTI, 24% PTI, 21% All 4 Provinces Error Margin +-2 to 3 % 20% PTI, 18% PTI, 18% PTI, 18% at 95% Confidence Level) 13% PPP, 16% PPP, 17% PPP, 13% PPP, 13% PPP, 14% 5% 2014 2015 2016 2017 Mar-18 Source: Gallup Pakistan, Topline Research Public Poll: Perception between 2015 and March 2018 (Imran Khan Vs Nawaz Sharif) Imran Khan Favourable Rating Nawaz Sharif Favourable Rating 59% 60% 57% 51% Gallup Pakistan National Political 50% 49% Opinion Polling (Sample Size N 2000, 46% 40% All 4 Provinces Error Margin +-2 to 3 % 39% at 95% Confidence Level) 35% 37% 30% 20% 2015 2016 2017 Mar-18 Source: Gallup Pakistan, Topline Research Pakistan Politics 9 We expect PTI to Lead The Govt. Despite Stiff Competition . We believe that there will be a neck to neck contest between PML-N and PTI. However, the probability of PTI led Govt. is higher due to defections of PML-N lawmakers to PTI as discussed later as well as dent in popularity of PML-N on the back of on-going Panama case trial. We expect PTI to grab 85-95 seats and believe that there is a 75% probability of PTI to form the Govt. with independents and other parties to reach the majority of 137 seats. Here, we cannot rule out PML-N’s surprised victory in 2018 elections where sympathy vote factor could play an important role. Since it will be a close contest, there is 25% likelihood that PML-N wins highest number of seats and form a coalition Govt. with PPP, independents and others. Pakistan Politics 10 Market is Expected to Gain Post Elections in Both scenarios Likely Government Scenarios PTI Led PM-N Led Coalition Govt. Coalition Govt. (75% probability) (25% probability) Market Reaction Neutral to Positive Positive Comment: We believe that coming into power for Comment: If PML-N comes into power, it will be largely the first time, PTI Government’s response to current positive for the market as there will be less uncertainty economic situation and other challenges will dictate over economic policies of the Government, we believe. future direction of the market. Index can rise up to Index can reach 50,000 by Dec 2018. 48,000 by Dec 2018. Pakistan Politics 11 Expected Party Position and KSE-100 Index Target by Dec 2018 Party NA Seats (Out of 272) 2013A 2018E PARTY Seats % Seats % PTI 28 10% 85-95 31-35% PML-N 127* 47% 80-90 29-33% PPP 32 12% 35-40 13-15% Others 81 30% 47-72 17-26% Total 268** 99% 272 100% Source: ECP, Topline Securities 2-4 seats statistical error may exist *excluding independent candidates ** elections were not held in some seats due to law & order and other reasons . Based on our analysis and taking cue from our poll of market participants, we estimate Pakistan KSE-100 index to go as high as 48,000 in case of PTI led Govt. while the index may go up to 50,000 if PML-N leads. The reason for a post elections rally will be political stability and Pakistan’s likely entry into an IMF program. Lower upside of the index in case of PTI is owing to uncertainty over its economic policies while in case of PML-N, market is expected to show higher level of confidence. The above index target is also in line with our Dec 2018 index target that we mentioned in our Pakistan strategy report issued on Dec 18, 2017. Pakistan Politics 12 PTI Likely to Win 85-95 NA Seats Out of 272 2018 likely seats scenario 2013 seats position Source: ECP, Topline Research *2-4 seats statistical error may exist Pakistan Politics 13 PTI Likely to Win 85-95 NA Seats Out of 272 . We expect PTI to grab 85-95 seats in 2018 elections compared to 28 seats in 2013. We have taken into consideration the recent defections of PML-N lawmakers to PTI and the impact of Southern Punjab Mahaz movement (South Punjab has 46 NA seats out of 141 Punjab seats). Moreover, based on the announced candidates list for 2018 elections, we have observed that PTI has fielded some strong candidates (electables who enjoy strong standing in their respective constituencies and won seats in 2013 elections) for Punjab constituencies, which will place PTI in a better position to get more than 50 seats from Punjab including over 20 seats from South Punjab, we believe. In another provinces, we expect PTI to maintain its 2013 position except for Sindh where we expect the party to fetch some more seats in Urban Sindh due to division in MQM which used to dominate Karachi. There is also a narrative among people that both PML-N and PPP had been into power multiple times now and that people are looking for a change. Further, unlike other political figures, there has been no corruption charges against Imran Khan and his philanthropic work has attracted many followers.