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Pakistan bourse likely to continue 2016's 'dream run'


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Pakistan bourse likely to continue 2016's 'dream run'

After a stellar 2016, Pakistan's stock market's bull run is expected to continue into 2017 thanks to a convergence of favorable factors. Chief among those factors are the upswing in the "investability" of the Pakistani equity market, the stock exchange's demutualization and the country's improving economic outlook, analysts in Pakistan told S&P Global Market Intelligence.

As 2017 got under way, the benchmark Pakistan KSE 100 outpaced its neighboring markets to become the region's best performer. The KSE 100 grew 96.02% between year-end 2013 and Jan. 12, 2017, compared to the Stock Exchange of Thailand's Index's 27.47%, the Jakarta Stock Exchange Composite Index's 22.31% and the Philippines Exchange Composite Index's 21.39%. In 2016 alone, Pakistan's index rose 45.68%.

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The announcement in June 2016 that the MSCI Pakistan Index will regain entry into the MSCI's Emerging Market grouping was a major step in invigorating market sentiment, Ibad ur Rehman, an equity analyst for Elixir Securities Pakistan (Pvt.) Ltd., told S&P Global Market Intelligence. MSCI in late 2008 had dropped Pakistan from its Emerging Market Index grouping used by institutional investors worldwide, citing deteriorating investment conditions as a result of the global financial crisis and the "near total paralysis" over a number of months of equity trading in Pakistan after the imposition locally of market rules aimed at maintaining prices at artificial levels.

The country since has been on the road to recovery. "The Pakistan market had a dream run in 2016 as market risk premium declined due to the MSCI's announcement to include Pakistan in the emerging market space ..., robust domestic liquidity and relative stability on the political landscape," Zoya Ahmed Zaidi, a senior investment analyst at AKD Securities Ltd., also noted in an interview.

The equity market may also have continued benefiting from investors' dwindling opportunities for high returns in other investment channels. For example, "[s]tringent regulation for the property market in the fiscal 2017 budget has [already] diverted flows to equity market," Nauman Khan, head of research at Foundation Securities (Pvt.) Ltd., noted in an interview. "But more importantly, [the stock market's strong performance] is also due to a lack of returns in fixed income. Interest rates are now at historic lows making life extremely difficult for the fixed income people, which have caused them to look toward equity market."

Going forward, the government's moves to consolidate the Karachi, Lahore and Islamabad bourses and sell a 40% stake in the combined entity may also be result in a promising boost to competing globally for investments.

Key economic conditions also generally give reason for optimism. The IMF expects the country's economy to grow 5% in the fiscal year to June. Pakistan's economy had grown an estimated 4.7% in the fiscal year to end-June 2016, from 4% in 2015, according to the Asian Development Bank.

But challenges remain. Exports are small in relation to GDP and the low level of private investment is unable to support higher growth, the IMF, which cleared the payment of US$102 million of a US$6.4 billion three-year economic reform program, wrote in a 2016 country report.

Then there's the estimated US$44.5 billion development project known as the China Pakistan Economic Corridor. To date, it has been contributing positively to Pakistan's economy and the country is expected to experience a surge of foreign direct investment because of it. The IMF projects that CPEC-related capital inflows will be the equivalent of about 2.2% of projected GDP in fiscal 2019 and 2020.

However, CPEC also warrants caution, the IMF warned. For instance, it noted that Pakistan will need to manage increasing CPEC-related outflows once Chinese investors start repatriating profits.

Khan also cited the potential concern about the ability of companies to pay down the loans they have taken out as part of many CPEC-related infrastructure projects.

Despite such possible headwinds, the analysts speaking with S&P Global Market Intelligence expect 2017 to be another strong year for Pakistan's stock market. Khan believes that the KSE 100 will reach 55,000 points by December, implying an upside of 15%.

"In our base case, we believe earnings growth will drive the market upwards amid ample domestic liquidity and attractive valuations to its peers," he said.

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