Pakistan stock market benchmark Index inching towards 46,000

Continuing its strong run, the benchmark of Pakistan Stock Exchange marked another stellar week ended on 8^th December 2016 and closed at 45,387 levels. The rally was driven by high oil prices, continued expansions in industrial sectors and announcements of corporate actions. LUCK announced plans for entry into automotive business through setting up manufacturing plant in partnership with Kia motors, furthering operations in Iraq while expressing intention to bid for DCL's assets, keeping sentiment strong. Other announcements included TREET and ICI’s plans to invest in the pharmaceutical sector, Shanghai Electric sharing a US$9 billion investment plan following KEL’s acquisition and BoD approval of MCB and NIB merger. Additional key news flows included: 1) Continuation of Supreme Court hearings of Panama case, with PM Sharif facing criticism from the court for failing to provide a money trail for asset purchases, 2) GoP raising Rs147 billion through Treasury Bills auctions where cut‐off yields remained stable, 3) cotton arrivals increasing 13.8%YoY for the season, 4) delay in bid opening process for the 40% divestment of PSX and 5) CCP imposing a penalty of Rs150 million on PSO for deceptive marketing. Market leaders during the week were: LUCK, ICI, PIOC, FCCL and AICL; while laggards were: ASTL, EPCL, HASCOL, PSMC and LOTCHEM. However, activity at the Exchange tapered 15.3%WoW with average daily trading volume of about 393 shares. Foreigners remained net sellers for the week, though outflows stood lower at US$24.8 million as compared to US$33.5 million a week ago. Oil stocks is likely remain in limelight as the next week kicks off, following the OPEC and Non‐OPEC meeting to decide on oil output cuts set for tomorrow. Moreover, the US FOMC is scheduled to announce monetary policy next week, with broader anticipations of a 25bps hike in Federal Funds Target Rate (FFTR). However, Fed’s outlook for FFTR trajectory in CY17 remains a risk event for global markets. Resurgence in political noise on Panama case developments remains a possibility, to potentially force some profit taking next week.

The US FOMC is largely anticipated to increase the fed rate in its upcoming monetary review next week  that coupled with a surge in inflationary expectations post Trump victory has pushed the greenback to its 14-year high. Within this context, the upcoming meeting retains particular importance as Fed's economic projection for future rate trajectory can alter the dollar outlook. While most regional currencies have witnessed erosion against US$, the PkR/US$ parity has held its ground. Moreover, GoP's ongoing drive to normalize kerb‐rates is a strong signal of its policy to maintain currency stability. However, going forward analysts fear some decline due to: 1) exports weakness amid lower currency competitiveness in the region, 2) higher oil prices adding to import bill and 3) potential delays in foreign debt flows to support foreign exchange reserves.

We revisit our investment case of LUCK as it has formally announced to further expand its business portfolio. The new list of projects comprise of: 1) setting up of manufacturing plant of Kia motor vehicles, 2) expressing interest in acquiring DCL's 1.134 million tpa Hattar plant, 3) doubling capacity of Iraq JV to 1.742 million tpa and 4) indirect additional exposure in the pharmaceutical business through its subsidiary, ICI (expressed interest in acquiring certain assets of Wyeth Pakistan Ltd). Assuming the DCL acquisition is successful, LUCK's earnings can increase depending on DCL's post acquisition performance. Whereas, doubling Iraq JV's capacity can result in incremental earnings.

Up-gradation of prevailing MOGAS standard (from 87RON to 92RON) and the accompanying launch of high octane variants by OMC's has rejuvenated the drive for volumetric sales growth, as seen in the November’16 figures released by OCAC. Running a preliminary market sizing analysis, some analysts ascertained the impact of these fuels (reportedly deregulated but an official notification is still awaited) on SHELL, HASCOL and PSO's earnings. Moreover, deregulation resonates positives for OMC's, namely: 1) additional cushion against wild swings in cost of supply, as increased costs can be passed on without a lag and higher margins raise earnings profile and 2) low receivables in motor fuels segment, increasing avenues for growth steering clear of liquidity pangs.