Pakistan Stock Exchange closes at all time high

The benchmark index of Pakistan Stock Exchange (PSX) closed at an all‐time high of 42,849 points for the week ended 11^th November 2016. Average daily traded volumes inched up by 2%WoW to 494 million shares where volume rankings continued to be occupied by second tier scrips such as: BOP, PIAA, TRG, TELE and SSGC. Leaders during the outgoing week included: AGTL, MLCF, SSGC, FCCL and FFBL while laggards included: SHEL, KEL, HUBC, OGDC and NBP.

Key developments during the week included: 1) almost 22%YoY increase in trade deficit to US$9.32 billion during first four months of current financial year, 2) a 3.83%YoY decline in workers' remittances to US$6.26 billion, 3) increase in cutoff yields of Treasury Bills of 3 and 6 months tenors, while all the bids for 12-month papers were rejected, 4) the GoP’s plan to issue international Sukuk Bonds worth US$500 million against Islamabad Lahore Motorway for budgetary financing and 5) nearly 13%YoY growth in total cement dispatches to 3.527 million tons in October 2016 due to a rise in infrastructure development.

Though, political tension eased off with PTI calling off its protest, political risk remains as Panama‐gate’s next hearing is scheduled for 15^th of this month. However, analysts expect market to continue its rally led by heavyweight sectors like cements and banks. The monetary policy to be announced later this month is expected to maintain status quo. Also, OPEC meeting later this month in order to decide production cuts may provide boost to E&Ps.  

Results for the US presidential elections place Donald Trump as the US President Elect. While analysts believe that the US foreign policy under Trump presidency can be volatile in nature, there is also a possibility of an overhaul in US‐Pak relations. The republican's campaign rhetoric compels analysts to believe that micromanagement and unilateral actions along Pakistan's borders may ease out under Trump presidency.

In this backdrop, Pakistan has done well by diversifying its foreign relations towards Russia (joint military exercise recently conducted in Pakistan) and China's ongoing ambitions in investing heavily into Pakistan. In line with global markets, near term volatility at the PSX also cannot be ruled out. However, Pakistan market's correlation with regional markets has decoupled on the former's possible inclusion in the MSCI EM Index and momentum for infrastructure and economic development together driving 21%CYTD returns for the benchmark index which is expected to continue in the medium to long term.

Dull exports in continuation of what has been the unflagging trend now, Pakistan exports remained on the lower side for September 2016 at US$1.52 billion as compared to US$1.72 billion for September 2015, down 11%YoY. Total exports registered a decline across all segments, with the highest impact coming from heavyweights Textiles and Food sectors, which were US$961.0 million / US$238.8 million, sliding by 12.1%YoY / 14.7%YoY. Consequently, 1QFY17 total and textile exports were recorded at US$4.68 billion and US$3.03 billion respectively, marking a decline of 9%YoY and 6%YoY.

Going forward, analysts expect textile exports to continue remain under pressure due to: 1) slowing Chinese demand, 2) lack of currency competitiveness limiting GSP plus benefits, 3) concerns of an economic slowdown in the EU following Brexit, constituting 20%‐25% of textile exports, and 4) shortage of cotton supply after tapering cotton production last year with arrivals down by 34%YoY. However, the soon‐to‐be announced export incentive package worth Rs175 billion by GoP, in a bid to reduce the cost of doing business and enhance competitiveness of export‐oriented industries with regional countries, remains a key near‐term trigger for the sector.

Forecasting steady spell of growth for OEMs in the country, sector experts analyze the current value proposition of the three major assemblers, being Japanese in origin. Highlighting the positioning of each in the prevailing market structure, analysts point to avenues for deepening demand of locally produced offerings. Commenting on the rise of Japanese OEMs in the region, they look at falling demand in traditionally high growth markets (Thailand, Malaysia) as a reason to aggressively introduce new offerings, as CKD units are freed up, and may be diverted to high growth markets. FTA being discussed through bilateral arrangements (Thailand, Turkey and Korea) may further this move, but on the flipside, favor new entrants. The case of low price, eco segment vehicles making up a large portion of first time car purchase, in the region, particularly in Thailand may be implemented at home. Price competitive offerings in the 1000CC and below segment make up to 50% of overall passenger sales, while the small economy segment (below 800cc) dominates the import market (4,417 units imported in 2MFY17 making up 52% of total imports).