KARACHI: Arif Habib Ltd (AHL), which is the investment banking arm of the eponymous industrial conglomerate, said on Friday it expects inflation will be back in single digits in the second half of the next calendar year because of the high base effect, currency stabilisation, monetary easing and a slowdown in global commodity prices.

Speaking to the press at the launch of a report titled “Pakistan Investment Strategy 2022,” Arif Habib Ltd CEO Shahid Ali Habib said the inflation outlook depends on the pace of domestic demand, fuel and electricity rates besides global commodity prices.

“As the year progresses, we expect aggregate supply (is) likely to catch up with demand and bottlenecks in global commodities and other goods markets (will) be resolved,” he said, adding that commodities prices are likely to “moderately slow down” in the middle of 2022 with a pick-up in supplies.

AHL expects the policy rate to increase from the current 9.75 per cent to 10pc by June. With inflationary pressures likely to subside in the second half of 2022, the benchmark interest rate will decline and close the calendar year at 9.25pc, he said.

The brokerage house expects the country’s external account will remain under pressure in the near term and recover in the second half of 2022. “Despite challenges on the external front, the current account deficit is expected to be fully financed from external inflows and the foreign exchange reserves are expected to remain at adequate levels through the rest of the fiscal year,” he said.

As for the fiscal side, he said the revenue collection is expected to improve with the government intending to eliminate certain tax exemptions while curtailing current and development expenditures.

“Over the next few quarters, our base-case foreign exchange outlook is less pessimistic than initially feared. We expect the rupee to reach Rs178 by June and Rs183 by December,” he said, adding that the Financial Action Task Force is likely to upgrade Pakistan’s status from the grey list to the white list by the end of 2022.

Stock market forecast

Mr Habib said he expects the KSE-100 index to reach 55,000 points by the end of the next calendar year, an upside of roughly 25pc.

“Our forward price-to-earnings (P/E) multiple for 2022 comes out to 4.9, which is lower than the last 10-year P/E of 8.3... earnings growth is expected to clock in at 12.4pc,” he said.

Mr Habib said he foresees an increase of 12.4pc in the earnings of the constituent companies of the KSE-100 in 2022. The estimate is based on a likely jump of 18.3pc in banks’ earnings and a 29.8pc increase in the profits of energy exploration and production companies.

Given the swings in the market during the last six years, the index underwent a broad sell-off worth $2.3bn from foreign investors. Foreign ownership as a percentage of free-float market capitalisation dropped to a 10-year low of around $2bn, he said, noting that the number will further come down to $500 million after excluding the foreign strategic holding.

“We believe the recent (MSCI) reclassification to the frontier from the emerging market is likely to regain the attention of foreign participants,” he said.

Published in Dawn, December 25th, 2021