Pakistan Stock Exchange Benchmark Index Inching Towards 52,000 Level

Pakistan Stock market continued its rally ahead of the MSCI EM inclusion announcement with the benchmark index closing at the all‐time high level of 51,751points (gaining 3.81% WoW) for the week ended 12^th May 2017. Investors’ participation improved, evident from average daily trading volumes for the week increasing by 34.6%WoW to over 355 million shares. Major news flows during the week included: 1) the Federal Cabinet approved the Budget Strategy Paper for FY18 targeting 6% GDP growth along with plan to bring down fiscal deficit to 4% of GDP by FY20, believing that PML-N rule may continue post 2018 election, 2) Board of Directors of Pakistan Stock Exchange (PMX) approved the sale of remaining 20% shares of the exchange to the general public through IPO with floor price of Rs28/share, 3) trade deficit widened 40.12%YoY to US$26.5bn in 10MFY17 while remittances declined 2.79%YoY to US$15.596 billion in the same period, 4) budget deficit escalated to 3.7% of GDP in 9MFY17 (3.4% in 9MFY16) indicating that GoP will miss its 3.8% target for the current financial year and 5) cement dispatches during April’17 grew by 1.7%YoY to 3.57 million tons with cumulative 10MFY17 dispatches rising to 33.88 million tons. Major gainers during the week were: AICL, MCB, PPL, POL and NML; while losers were: LOTCHEM, HASCOL, AGTL, HCAR and MEBL. Foreign selling eased slightly with net outflows of US$2.46 million compared to US$19.27 million a week ago. Analysts maintain a positive outlook on market’s performance with Pakistan’s formal graduation to the EM space in the MSCI Semi‐Annual Review to be announced on 15^th of this month. In this backdrop, analysts favor (OGDC, HBL, UBL, MCB, LUCK, PSO, HUBC, ENGRO and NML). Moreover, incoming proposals for the upcoming Budget FY18 are likely to keep investors’ interest robust.

Declining oil prices eroded the global commodity index by 2.1%MoM during April'17. Oil prices declined due to the high stockpiles and abundant supplies despite the OPEC's cut in place. Following on, similar price trend was seen across major commodities with Steel (down 15%MoM on declining Chinese exports amid surging inventory levels), Urea (down 9%MoM on continuous capacity additions) and FAO Dairy index (down 3.3%MoM on account of peaking seasonal production) losing out the most. Cotton prices remained flat on strong demand from cotton importing countries, currently standing at their 3yr high. Going into May'17, oil producers meeting regarding extension of the agreed supply cut holds significant importance with implications spilling on to overall commodity price trend.

The significant rise in current account deficit (2% of GDP in 9MFY17 vs. 0.83% in comparable period) has emerged as a serious concern for the external account. This downward spiral is expected to continue in remainder of the fiscal year, with CAD expected to reach 2.7% of GDP‐ highest since FY09. This revision in CAD estimates is driven by: 1) worsening trade balance (projected decline of 34%YoY in FY17F) and 2) falling remittances (‐1.3%YoY in FY17). In addition, respite from this trend seems unlikely with CAD projected to further widen to 3.8% of GDP in FY18 in line with a growing trade deficit (19.7%YoY in FY18) due to higher petroleum and development‐related imports. This in turn remains a key concern for foreign exchange reserves which are projected to end FY17/FY18 at US$21 billion/US$17.5 billion as compared to US$23.1 billion in FY16), opening room for currency depreciation.

In line with ENGRO's diversification􀆟on strategy to realign towards relatively higher yielding energy vertical, the company through its subsidiary Kolachi Portgen (Pvt) Ltd ‐ KPL (100% stake) has recently filed a tariff petition with NEPRA for approval of US$392.3 million, 450MW (441.77MW net capacity) RLNG based Power Plant at Port Qasim, Karachi. Expected to commence commercial operations by the end of CY19 (27 months construction period from financial close), the project is expected to deliver IRR of 23.5% by transmitting 100% net capacity to KEL under a power purchase agreement (Letter of inter‐LOI issued by KEL) at an expected levelized tariff (at base case ‐ RLNG without compressor) of Rs7.09/KwH for a period of 30-years at 92% load factor.