Pak-India border tension keeps local bourse under pressure

Despite prevailing India-Pakistan conflict the benchmark of Pakistan Stock Exchange inched up to close at yet another all‐time high of 41,464. Though, average daily traded volumes declined 33%WoW to 404 million shares. Top slots in volume ranking continued to be occupied by second tier scrips like: BOP, TRG, ASL, JPGL and BAFL. Leaders during the outgoing week included: HASCOL, AKBL, SHEL, BAFL and ASTL, while laggards were: LOTCHEM, EPCL, FATIMA, PTC and DAWH.

Key developments during the week included: 1) new deadlines set by the government for privatizing Pakistan Steel Mills and Pakistan International Airlines, 2) Chinese investors expressed keen interest in investing in troubled businesses in Pakistan, 3) IMF Mission Chief to Pakistan said that country’s foreign currency reserves have not yet reached a comfortable level, 4) China will help Pakistan in rehabilitation and expansion of its railway system starting with 1,700km Karachi‐Peshawar track at a cost of US$8 billion that is expected to be completed in 5 years and 5) China Petroleum Pipeline Bureau agreed to construct LNG terminal at Gwadar on EPC basis envisaging 700km pipeline (42‐inches diameter) from Gwadar to Nawabshah.

The market is anticipated to remain under further pressure in upcoming weeks as PTI’s sit‐in (starting 30^th Oct) is planned to immobilize the government until accountability of Prime Minister, Nawaz Sharif begin for his alleged inclusion in Panama Leaks. Though the border tension with India has eased in recent days, the risk of escalation continues to persist. While the market was driven by E&P sector recently in the wake of OPEC’s nod to output deal, oil price volatility till finalizing the deal (on 30^th Nov) presents further risk to the market.

Deriving strength from the uptrend in oil prices, the global commodity index rose by 3.4% MoM in Sep'16. In this regard, oil prices remained volatile, firming ground by the month end on OPEC's decision to cut output. Following on, while coal prices went up by 8.9%MoM owing to persistent supply pressures in China, steel prices, coal prices remained volatile due to re‐stocking of inventories by Chines mills. FAO Food Price Index was also up 2.9%MoM/10%YoY, going up steadily since Jan'16 supported by increasing sugar and dairy prices. Prices of commodities like urea and cotton remained sluggish on abundant supplies. Going forward, oil prices are likely to determine the trend in commodity prices where seamless completion of the output deal by OPEC in its Nov'16 meet can contribute further gains.

In order to revive the country’s dwindling exports, the GoP is considering certain amendments in the Textile Policy. While in FY14‐19 Policy the GoP has already lowered ERF and LTFF rates to 3.0% and 6.0% respectively, further proposed incentives in the form of increasing rebate (encouraging value‐added), in the range of 4‐6%, are being deliberated. In case the proposed incentive package is approved, the potential impact of the policy on textile sector is likely to be material. Remaining depressed for the most part of the year on account of continuous decline in exports, analysts believe the said incentive package (if approved) can rejuvenate interest in the textile sector.