Sort of Rs20bn fund should exist at all times for stock market
Also there is a right time to accumulate under the falling stock sectors
An Exclusive interview with Nazim Abdul Muttalib – Executive Vice President and Head of Broking, Ismail Iqbal Securities
PAGE: Ever since Pakistan and IMF reached agreements at ‘staff level’ there has been a reversal in investors’ sentiment. There has been substantial increase in PSX benchmark index; is this euphoria temporary or sustainable?
Nazim Abdul Muttalib: The staff level agreement with International Monetary Fund (IMF) and the follow up actions by the new economic management team have given a clear indication that the conditions set by the Fund will be met to the best of Pakistan’s abilities. This should provide confidence to the markets that corrective measures are in place and the IMF support is there as long as Pakistan sticks to the conditions set by the Fund. It also opens up more financing avenues such as World Bank, Asian Development Bank, Islamic Development Bank and various other bilateral/multilateral lenders. It gives Pakistan a chance to roll over its foreign floated Sukuks. Given this situation, coupled with more expected stabilization, in my view the euphoria to end and the positive sentiments to continue. Moreover, the increase in benchmark index can be further attributed to government’s announcement of market support fund to contain the declining prices and take advantage of distressed selling prevalent in the market.
PAGE: What were the reasons for persistent selling by foreigners?
Nazim Abdul Muttalib: Foreigners have been sellers ever since the inclusion of Pakistan in the MSCI-EM, the main reasons for this was the over stretched valuations of Pakistan vis-à-vis its own averages. The over stretched valuation were also coupled with deteriorating macroeconomic numbers, and a large current account deficit which made it obvious that corrections in currency and interest rates was on the cards. Bad news continued with the HBL controversy resulting in the largest fine ever paid by a Pakistani company and the FATF rules that dented investor confidence by making it increasingly difficult to invest in the stock market. This selling stopped or reversed when the valuations came to a point where all these shocks were reflected in the price and the currency had devalued by a sizeable approximate 45%.
PAGE: Do you believe that it is an appropriate time to accumulate as the prices have fallen to attractive levels?
Nazim Abdul Muttalib: This depends on how confidant one is about the fate of the economy of Pakistan over the next 2 to 3 years. In my personal opinion this is just a part of the boom bust cycle that Pakistan experiences and this is the right time to accumulate. We also think that we should focus on the out of favor sectors such as cements and steel (post budget to more visibility) and capitalize on the upside once the interest rates cycle reverses which will make earnings and valuations both to go higher.
PAGE: There is a talk about creation of ‘Stock Market Support Fund’ of about Rs20 billion. Do you support this idea?
Nazim Abdul Muttalib: This sort of fund by the state should exist at all times, calling it a market support fund/or disaster support fund is incorrect. This should be an opportunity fund for the state and it should always be there to take advantage of the cheap valuations that open up, it should not be an exercise that come into play every time the markets take a steep fall, it should rather be a passive fund that takes advantage of situations like these whilst providing liquidity to the remaining participants.
PAGE: Foreigners’ investment has been confined to blue chips; do you believe these companies still enjoy strong fundamentals?
Nazim Abdul Muttalib: In short YES!, banks are available at 1.2 to 1.3 book values these are valuations not seen in a while, similarly some oil stocks are trading at PE ratios of under 6, while carrying 7 to 8 percent dividend yield, so the fundamentals are intact. Also if we see these blue chips companies are mostly free of debt and beneficiary of the devaluation therefore providing a hedge against any adverse currency moves. Also the fact that IMF is here gives more clarity on the macro front making it easier to call the top of the interest rate cycle and the devaluation.
PAGE: What are your top three suggestions for making Pakistan stock market robust?
Nazim Abdul Muttalib: My three suggestions are:
- Do not delay reversing of interest rates; we should cut rates as soon as we find space.
- Give investors relief in capital gains and increase the time to be able to offset against losses.
- Ensure 100 percent transparency and communicate the state of economy and the corrective measure you are taking effectively whilst instilling confidence that responsible people are heading the helm and will be able to navigate us through the head winds.
PAGE: Do you support ‘outright sale’ of state owned enterprise or sale of their 10% shares through stock exchange under ‘Privatization for People’ program?
Nazim Abdul Muttalib: Outright sale, these State Owned Enterprises (SoEs) are run inefficiently and will not result in correct valuations if listed. It is the state’s business to prepare policies and implement these. The government should not be in the business of managing airlines and factories. The state will always be influenced and these things better be left to the private sector as opposed to the government. Large projects need government support, but that should come in forms of guarantees or subsidies not outright equity investments and ownership.