VALUE SEEKER

A Daily Publication of InvestCap Research

Pakistan Research
Market Cap. (USDbn): Avg. Daily Vol.(CY1T): Market Outlook: Earning Growth (2011E): KSE Dividend Yield (2011E): KSE PER (2011E): 36.60 112.06mn
Positive

Friday, April 22, 2011

Negative outlook for US, blessing for emerging region

Highlights
Change in US sovereign rating outlook - blessing for emerging equities Implications for Pakistan equities Outlook and Recommendation

15.5% 7.29% 7.80x

130% 120% 110% 100% 90% 80% 70% 60% 50% 40%

KSE-100

In today's Value Seeker, we present the impact that may result in the form of higher foreign inflows towards emerging as well as frontier market equities in the wake of recent change in the US rating outlook. Pakistan equities short-to-medium term outlook is also provided.

Change in US sovereign outlook - blessing for emerging equities

Finally, the Standard & Poors (S&P) outlook changed for the US fiscal side concerns alongwith weak political will to correct economic distortions seems to have started paying off as foreign funds flow towards emerging and frontier markets has taken its way. This can be observed by looking at the latest foreign portfolio investments in the Asia Pacific region, which, until 1QCY11 (Jan-Mar11), stood mostly in the negative. On the other hand, the month of Apr-11, and specially the last week wherein inflows got bigger in quantum, has been quite robust as far as foreign inflows towards the Asia Pacific region are concerned. The tendency was such strong that the entire 1Q negative figures turned positive from a net total outflow of USD2.1bn during 1QCY11 to significantly positive USD3.7bn YTD (Jan-11 to date). This confirms that money has to flow towards a destination of growth compensating risks and not where little growth is realized given a relatively higher level of risk. The fiscal concerns of the Eurozone and the US are therefore proving to be the blessings for both emerging and frontier markets. As far as returns associated with the Asia Pacific markets are concerned, there has been a similar lackluster performance observed with most of the markets while Apr-11 has so far turned a better month (see second table on the left).

Aug-10

Apr-10

Dec-10

NET FOREIGN FLOWS

REGION (USD MN)

Country 1QCY11 MTD India (657) 1,964 146 (3) 328 554 Indonessia (305) Pakistan Philippines S. Korea 59 (42) WTD 388 69 1 15 YTD CY10E 1,307 28,425 (159) 56 286 2,195 514 1,211

Oct-10

- ASIA PACIFIC

Feb-11

Jun-10

Apr-11

Implications for Pakistan equities

After having received a robust net inflow of USD514mn during 2010, Pakistan capital market has been one of only few regional markets standing with positive net inflows amid MENA Taiwan (1,160) 1,977 526 816 9,076 crises and a series Earthquakes in Japan followed by heavy outflows from emerging Asia Thailand (9) 798 228 790 1,881 and MENA regions. The recent outlook change of the US, a AAA rated country, may prove Vietnam 58 27 3 85 602 to be a crucial factor in pushing flows back towards emerging as well as frontier markets, Total (2,056) 5,791 1,784 3,734 63,561 which previously were flowing out of these markets on the back of afore-mentioned Source: Bloomberg, InvestCap Research concerns. In this regard, Pakistan can be one of the attractive destinations as KSE100 MARKET RETURNS * - ASIA PACIFIC REGION provides a better deal in terms of dividend yield and still prevailing lowest price to earning multiple in the Asia Pacific region (currently at 40% discount compared to historical discount of ~33%). The YTD net inflows to KSE100 now stand at USD56mn while the market is already Country 1QCY11 MTD WTD YTD CY10E up by 2.1% WTD that is higher than not only YTD returns but also MTD returns. India -5.9% 3.1% 0.4% -3.0% 25.2%
554 554 19,657 Indonessia Pakistan Philippines S. Korea Taiwan Thailand Vietnam 4.1% 5.5% -3.7% 2.0% 0.6% 2.3% 6.2% 5.9% -4.0% 4.9% 1.2% 7.9% 2.9% 2.1% 1.6% 9.8% 68.2% -1.7% 18.6% 3.0% 85.5%

Outlook and Recommendation

In the short term, KSE100 is expected to observe Apr-Jun11 as a relatively lull period as budget expectations with the fear of unknown come closer. However, stubborn rise in the intl oil prices (benefitting oil&gas sector) with contained external account position of the country (with stability in local currency) may attract more inflows towards equities. This, from a medium-to-long term perspective, is expected to provide impetus to Pakistan equities trading at huge discount of over 50% at key multiples amongst the global peers. Khurram Schehzad kshehzad@investcapital.com +92 21 35 20 87 25

2.8% 12.4% 31.1% 2.0% 3.2% 0.7% 25.4% 9.2% 58.5%

-9.6% -2.1% -1.0% -11.6% 14.9% 4.7% 16.4% -4.6% 18.9%

MSCI Emerg. 1.7% 3.0% MSCI Front. -6.6% 2.1%

Source: Bloomberg, InvestCap Research, *Mkt Cap

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