Supreme Court verdict stays short of disqualifying Pakistan Prime Minister Nawaz Shari

Supreme Court verdict stayed short of disqualifying Pakistan Prime Minister Nawaz SharifIn a split 3-2 decision, the Supreme Court (SC) while forming a Joint Investigation Team (JIT) stayed short of disqualifying the Prime Minister (PM) in the eagerly awaited Panamagate decision on Thursday, allowing the PM to continue holding office.

The JIT [to be comprised of one senior official each from the FIA, NAB, SECP, SBP, ISI and MI] has been tasked to investigate offshore assets [incl. money transfer to Qatar] of the PM’s family.

In this regard, the SC also ordered PM Nawaz Sharif, and his sons Hasan and Hussein to appear before the JIT.

The JIT will be formed in the next 7 days and has also been ordered to present a report every two weeks before the five-judge SC bench and conclude the investigation in 60 days.

Our take

The efficacy of the agencies represented in the JIT to conduct an independent investigation against a sitting PM is going to be challenging, in our view, as some of these agencies have reportedly expressed an inability to conduct an inquiry citing various reasons such as immunity of public office holders, lack of evidence, legal jurisdiction, etc.

At the same time, the plaintiffs will also have to produce a new set of supporting evidence as the ruling deems the current evidence to be inconclusive. This can be challenging for both the plaintiffs and the JIT to complete the investigation in the stipulated 60 days.

Market Reaction

The market has reacted positively (KSE100 up 3.85% intra-day to close with a gain of 2.57%) as the delay in the Panamagate verdict had clearly been an overhang on market sentiments (momentum which picked up in the closing months of 2016 petered out with the KSE100 marginally down 0.4%CY17TD).

In this backdrop, daily value traded is materially down to average US$113.7mn in Apr’17-to-date compared to US$274.4mn in Jan’17 and to its 6 months average of US$194.87mn.

The market has been in a consolidation mode (down ~3%) since the verdict was reserved on Feb 23’17. In this regard, the benchmark has regressed from  close to +2 standard deviation towards +1 standard deviation (vs. the one year moving average) in the review period.

With political uncertainty now relatively lower, we expect the market sentiments to improve with focus now being upon the upcoming MSCI EM inclusion and Budget FY18. In this backdrop, we recommend a thematic exposure in front line Banks (double digit loan growth from CPEC related activities expected to counter pressure from a relatively lower interest rate environment) with UBL (fwd. PB/PE 1.6x/9.7x) as our preferred pick, OMCs (robust volumetric growth as the industry prepares to increase storage) with HPL (CY17/18F PE of 19.6/15.1x) as our preferred pick in the space, Cements (double digit domestic demand growth with a vibrant private construction environment) with LUCK (FY17E PE 20.01x) as the preferred pick and Autos (healthy order book indicating steady demand, ability to increase prices) with INDU (FY17E/18F PE of 11.4/11.0x) making the cut in the auto space. 

Upcoming Checkpoints

·         Formation of JIT in next 7 days with investigation to be concluded in 60 days

·         Inclusion in the MSCI EM space in May’17 where Pakistan is slated to have a weight of around 19bps

·         Federal Budget FY18 expected to be announced on May 26’17. This would be the last budget of PML-N before general elections in May’18

·         Major political parties are expected to kick-start their election campaigns shortly

Panamagate Recap

·         Prior to the closing of hearing (reserved since Feb 23’17), the Supreme Court heard petitions in the Panama Papers leaks case filed against PM Nawaz Sharif, his family members and others.

·         To recall, the Panama Papers leaks in Apr'16, showed the Sharif family's connection to offshore entities registered in tax havens with assets vastly exceeding legal income sources.

·         No offshore company in the Panama Papers is in the name of Nawaz Sharif or his brother Shahbaz Sharif, Chief Minister of Punjab.

·         However, several entities are listed in the names of the PM’s three children, Mariam, Hasan and Hussain, who were owners or had the right to authorize transactions.

·         That being said, the PM and his children are accused [in the Panamagate case] of money laundering and owning offshore assets without disclosing the source and trail of funding.

·         The opposition led by the PTI (ruling party in the province of KPK, second largest party in opposition) began a spate of protests, threatening a street movement to force PM Sharif to face a proper inquiry over the claims in the leaks (ended on Nov 1’16 as the Supreme Court announced to hear multiple petitions in the case).

·         The delay in announcing a verdict had been due to the unavailability of SC judges hearing the case as they were in different registries of the SC.

A report by Pakistan’s leading brokerage house, AKD Securities