Pakistan stock market witnesses 6% decline in daily traded volume

The benchmark index of Pakistan Stock Exchange continued to experience volatility during the week on account of reported action by SECP against in‐house financing and uncertainty with regards to Panama‐gate case. Though market fell initially to one‐month low on first day of the week, it recovered thereafter closing at 49,624 points (+1.26%WoW) on rumors of a new leveraged product and SECP clarification on measures/regulatory oversight over brokerage firms. Average daily traded volumes fell by 6%WoW to 322 million shares where volume rankings were occupied by: LOTCHEM, ASL, KEL, ANL and TRG. Leaders during the outgoing week included: LOTCHEM, EPCL, AGTL, SNGP and ICI while laggards included: NCL, HMB, PIOC, DAWH and PPL. Key developments during the week included: 1) Pak Suzuki Motor Company (PSMC) sent an investment plan of US$660 million to the government, requesting same benefits/incentives for 2 years from the start of mass production of new models instead of 5 years granted to new entrants in the Auto Policy 2016‐21, 2) MUGHAL announced to set up 6 additional lines of 3.1MW gas CPP taking total CPP capacity to 27.9MW and spend Rs1.00 billion on these lines and BMR of existing re‐rolling mill, 3) SBP issued Rs387.4 billion worth of T‐Bills against the participation of Rs473 billion, 4) SNGP’s BoD approved a capital intensive project for development of 1,200mmcfd LNG pipeline from Karachi to Lahore at an estimated cost of Rs111 billion with expected COD of October 2018, and 5) CPI inflation hit a 3‐month high of 4.2%YoY in February  2017. The market is likely to remain volatile in the upcoming week due to lingering regulatory and political risks. Inflationary pressures on account of rising food and fuel prices are expected to strengthen hawkish monetary policy stance. In this backdrop, banks are expected to perform well.

Continuing to climb albeit at a slower pace than the tail end of CY16 bullish sentiment prevailed in global commodities market during February 2017. This sentiments were driven by hike in prices of commodities actively traded that included oil, Cotton, Steel and food commodity prices. Whereas, commodities witnessing decline in prices were Coal and Urea on the back of policies and capacities raising global production. Going forward factors driving commodity prices are: 1) divergence in global monetary policy, where any tightening in US rates could strengthen the greenback, softening commodity prices, 2) global economic activity picking up pace as global manufacturing PMI remain expansionary and 3) continued tightening of supply dynamics for energy prices expected to keep supply constrained. Lastly, political factors including expansionary fiscal policies by the US government and China's meeting of the Politburo Standing Committee are expected to renew commitments to infrastructure development, providing support to metals, energy and hard commodity prices.

After a fitting end to CY16 (promising rabi season), CY17 got off to a sluggish start with not only urea but cumulative fertilizer sales remaining depressed during January 2017 primarily in response to low crop prices (depressed agricultural commodity cycle) and crop shortfalls lowering farmer's income. According to latest figures released by NFDC, cumulative fertilizer offtake during the aforementioned month was recorded at 595,000 tons as compared to 1,278,000 tons in December 2016, declining significantly by 53%MoM, while it rose 21% on yearly basis. Specifically, urea sales during January 2017 were recorded at 406,000 tons as compared to 898,000 tons in December 2016, lower by 55% MoM, while it grew 19%YoY. On the contrary, imported urea sales went up to 15,000 tons in January 2017 on account of the discount offering with imported urea prices at 10% discount to its local counterpart. Following the trend, DAP sales also remained depressed, declining to 61,000 tons in January 2017. Post Rabi season, near‐term expectations are: 1) export of excess urea inventory and 2) change in international pricing dynamics.

CPI based inflation for February 2017 is projected at 4.1%YoY, considerably higher than 3.66%YoY registered in January 2017. While food prices are likely to see a dip on seasonal trend, this should be countered by the recent hike in petroleum prices. Consequently, 8MFY17 CPI average is expected to rise stand to 3.9%YoY compared to 2.5%YoY in the corresponding period. Going forward, analysts expect inflation levels to post a steady increase buoyed by higher price levels for food items and rising global oil prices.