Hike in global oil price drives Pakistan stock market

Despite recent political flares up the benchmark of Pakistan Stock Exchange PSX‐100 index closed at 40,542 levels for the week ended 30^th September 2016. The rally was primarily driven by index heavy-weight energy companies due to upward move in international oil prices and decision of the central bank to leave interest rate unchanged. Average daily volume for the week came down to 528.3 million shares as compared to 727.8 million shares a week ago. The volume leaders were: BOP, PACE, WTL, KEL and TRG. Performance leaders during the week were: INDU, SHEL, PSMC and LOTCHEM; while laggards included: MEBL, NBP, KAPCO and HASCOL.

Key news flows during the week included: 1) ICL launches new caustic soda IEM plant‐2 (Phase‐II) having capacity of 25,000 tons with a total project cost of Rs750 million, 2) ICI revealed its plan to set up a facility in Pakistan to manufacture Morinaga infant formula products in partnership with Morinaga and Unibrands, 3) public announcement of offer to acquire 49.8 million ordinary shares of EFOODS by FrieslandCampina at Rs151.85/share, 4) Executive Board of the IMF on 28^th September completed the 12^th review of Pakistan's 3-year economic reform program enabling the disbursement of the final tranche of about US$102 million, 5) China‐led Asian Infrastructure Investment Bank (AIIB) approved US$300 million loan to fund the expansion of a hydropower project in Pakistan, and 6) GoP expressed plan to raise US$1.00 billion from the international debt market through issuance of Sukuk in October this year.

Selling by foreigners also eased out during the week under review with net outflows declining to US$8.6 million from considerably high net outflows of US$16.04 million a week earlier. With result season nearing its end, a few market triggers are expected in the near term. However, political risk remains in place with PTI’s protest to continue in the days to come and recent tension between Pakistan and India may keep investors cautious. Following the OPEC’s hint to cut production for the first time in eight years, sent crude prices higher by more than 6%, which is likely to keep interest intact in index heavy weight energy companies.

Oil producers’ cartel, OPEC has hinted towards capping/cutting production in its informal meeting in Algiers. While details are expected to be finalized in the group's formal meet in November this year, the mere indication to cap/cut output raised oil prices by 6%. With expectations now tilting towards higher oil prices, analysts try to work out possible implications of the decision on the market AKD Securities report indicates that its E&P universe is likely to benefit the most with 4.2% higher FY17 anticipated earnings for every US$5/bbl increase in oil prices. OMCs on the other hand can lose out on retail fuel demand moving towards cheaper alternatives. Additionally, in the backdrop of higher oil prices, macro stability remains at risk with concerns emerging on: Balance of payment and exchange rate, good for export-oriented Textiles and IPPs with dollar-denominated revenues and fear of sharp escalation in inflation and its subsequent impact on interest rates.

Despite a challenging operating environment (super tax imposition, spreads at decade low), fundamental improvements by National bank of Pakistan (NBP) in areas is encouraging. The most prominent in this regard are: 1) growth in net interest income (NII) up 9%YoY and 31%QoQ and visible improvement in asset quality due to provisions down by 78%yoy and 48%QoQ in 1HCY16. With regards to the former, the bank has effectively brought down its domestic cost of deposit to 3.8% from 5.3% in 1HCY15 by building on its CASA. While credit quality concerns have not abated completely, these have been continually improving with NPL ratio coming down to 17.8% in June'16 as compared to 18.4% in December'15. Consequently, profitability in 1HCY16 has remained strong registering growth of 28%YoY/51%QoQ.