Pakistan Stock Exchange closes above 43,000 levels

Delivering persistent returns despite the recent spate of foreign selling (outflow of US$125.7 million since November'16), the benchmark Index of Pakistan Stock Exchange grew 0.63%WoW, gaining 271pts closing at 43,271 points. Supported by OPEC's decision to restrict crude output and resulting movement in global benchmarks (Brent/WTI gained 11.8/8.4%WoW), upstream Oil & Gas climbed higher.

Key news flows during the week were: 1) CPI for November’16 was reported at 3.81%YoY compared to 4.21%YoY in October'16, implying sequential increase of 0.21%MoM, 2) deregulation of 95 and 97RON MOGAS affirmed by Minister stating that 92RON would replace the 87RON previously being supplied, 3) Finance Minister announcing increase in price of petrol and diesel, 4) GoP releasing Rs248.1 billion for various development projects under public sector development program (PSDP) under the current financial year as against a total allocation of Rs800 billion during the previous year and 5) Pakistan Stock Exchange (PSX) scheduled to open bids on Monday, December 5, 2016 submitted by foreign strategic investors and local institutions to for acquiring 40 percent stake of the bourse. Key gainers at the bourse during the week were: EPCL, MTL, ICI and ENGRO, whereas laggards were: NCL, NML and HCAR. Average traded volumes were highest for: BOP, PACE, ASL and WTL. Approaching end of the year holiday season, foreign participation is expected to take a back seat as local funds and institutional investors, favoring blue‐chip plays offering value. Rise in local oil prices have further fueled expectations of a bottoming out of the monetary atmosphere keeping commercial banks in the spotlight.

Gaining 6.9%MoM in November'16, PSX‐100 index stood its ground in what was an eventful month for the world; while global equity markets struggled (MSCI EM/FM down 5%/2%MoM) on policy uncertainties post Donald Trump's election as US President. This was despite persistent foreign selling where outflow for the month rose to US$117.05 million ‐ the highest in CY16. While the entire main-board posted positive returns, Cements led the board returning 15.9%MoM (on anticipated strong growth in dispatches and reversal in coal prices after a short lived rally) followed by Textiles (+9.7%MoM due to anticipated pressure on local currency amid strengthening US$) and Chemicals (+8.0%MoM on reduction in gas prices for industries). Going into December'16, the market is likely to look towards the following, taking direction accordingly: 1) oil price trend in the light of OPEC's production cut agreement and the stance adopted by non‐OPEC producers following the decision, 2) FOMC meeting on December 13‐14 where any potential rate hike can continue prompting outflows and 3) on‐going Panama papers related hearing keeping political pressure intact.

To stimulate growth, news flows have disclosed that the ECC has approved a 33% reduction in gas prices exclusively for industries, bringing down prices to Rs400/mmbtu. As an official notification by OGRA is still pending, lack of clarity remains on the inclusion of certain heads in the concession to be availed. It is general understanding that the gas price reduction extends to general industries that utilize gas as a fuel source including Steel, Glass, Fertilizers (concession available on fuel stock only) and Textiles. While benefiting industries by and large, Fertilizers, the largest industrial consumer of gas, stand to benefit the most followed by Steels and Textiles. Cements, on the other hand, are likely to remain unaffected unless the concession is also extended to captive power generation‐ gas tariff for which is determined under a separate head. In this backdrop, while the Fertilizer sector might enjoy a short‐term rally, a weak demand outlook and depressed international pricing dynamics can continue restricting price performance.

Selling by foreigners keeps Pakistan stock market under pressure

The benchmark of Pakistan Stock Exchange breached 40,000 mark during the week ended August 19, 2016. This prompted the investors to indulge in profit taking in the later part of the week to pull the index below 40,000 level. Foreign selling added to the pressure with outflows for the week at US$18.38 million considerably higher than US$1.03 million earlier. Daily average volume for the week also declined 12.9%WoW to average 230.69 million shares.

Key news flows during the week included: 1) MTB yields remain unchanged across all tenors in the week’s auction despite heavy participation with bids amounting to above Rs659 billion where the GoP raised Rs373 billion, 2) FDI declined 14.6%YoY with net flows of US$64.3 million in July’16 with total foreign investment for the month at US$113.9 million on rising portfolio investments, 3) the NA Standing Committee on Finance approved the Benami Transaction (Prohibition) Bill, 4) ECC approved sale of imported urea available with NFML at a discounted price of Rs1310/bag compared to the subsidized local price of Rs1,400/bag, 5) GoP got ready to float fresh tenders for the import of 200 mmcfd of LNG to cope with the expected surge in demand during winter this year and 6) Privatization Commission sought comfort letter on PPA and generation license of KAPCO from the Ministry of Water & Power to offer GoP’s residual shares to investors during domestic road shows.

Interest in the coming week is likely to be centered on remainder corporate results for the quarter. Major companies scheduled to announce results include HUBC, KAPCO, OGDC, CHCC, BAFL, NBP and INDU. However lacking major triggers, the broader market is expected to remain listless. Global crude prices are likely to be tracked keenly ahead of OPEC’s meeting next month.

Renewing concerns on potential slowdown in remittance flows on worsening global financial dynamics, inflows during July'16 marked a sharp decline of 20%YoY/36%MoM to US$1.33 billion ‐ the lowest monthly flow since April'14. This reflected unfavorable developments that included: 1) slowdown in GCC economies on oil price slump and 2) US regulatory tightening on money transfer. While room remains for volatility in the Rupee on sluggish remittances, analysts maintain their FY17 forecast of 3% PkR/US$ depreciation on Pakistan’s foreign exchange reserve strength. In terms of its implication on the banking sector, some revenue dilution can be expected in UBL, HBL and NBP with remittances contributing more than 10% to total fee income approximately. However, expansion in branchless banking segment is likely to provide a buffer to any downside arising from slower remittances growth having no material impact on banks' earnings.

Exhibiting the brunt of monsoon season, latest APCMA's dispatches data depicts domestic demand growth of 3.9%YoY in July'16, far lower than 9.2%YoY growth in June'16. While flatter exports during July’16 as compared to the previous month indicated that freefall has likely ceased, settling at new normal levels post anti‐dumping duties imposed by major cement export markets (South Africa/Iraq). However, exports increased 20.2%MoM in July'16 as against a 15.7%MoM in July'15. While the slowdown in demand has much to do with the seasonal factors, analysts believe demand to start picking up from August'16 as construction activity is likely to pick pace post‐monsoon.