Pakistan Stock Exchange witnesses massive selling by foreigners

Following the announcement of Pakistan’s up gradation to Emerging Market status in the MSCI Index, the market nosedived and continued the downward trend during the week ended 19^th May as investors resorted to profit‐taking. The benchmark index closed at 50,742, down 1.95%WoW. Average daily traded volumes fell by 1.45%WoW to about 350 million shares, with EPCL, DSL, WTL, LOTCHEM and SILK as volume leaders. Key news flows during the week were: 1) As per provisional estimates FY17 GDP growth came in at 5.28% as compared to 4.51% in FY16, missing budgeted target of 5.7%, 2) As per State Bank of Pakistan (SBP) current account deficit widened 205%YoY to US$7.247 billion during first ten months of current financial year, 3) SBP granted an operating license to state‐run Bank of China to meet the financing needs of CPEC projects, 4) Supreme Court has ordered National Refinery to pay Rs305 million to SBP for failing to pay Saudi Aramco its dues on time and 5) FBR has blocked Rs100 billion sales tax refunds and rolled back the Refund Payment Orders( RPOs), claimed by the textile sector filed from the tax period July 1, 2016 onwards. Stocks leading the bourse during the week were: LOTCHEM, POL, PPL, AGTL and HMB, while laggards were: PSMC, HUBC, UBL, CHCC and MCB. Foreign participation remained weak with outflows of US$16.4 million compared to outflows of US$2.46 million a week ago. SBP is scheduled to announce Monetary Policy on Saturday (May 20’17). It is anticipated to be a non‐event with policy rate expected to remain unchanged. Budget FY18, to be released at the end of next week, can present opportunities depending upon expected taxation measures. Moreover, on the international front, continuation of oil supply cuts in the upcoming OPEC meeting scheduled for 25^th May.

Pakistan has been reclassified as part of the MSCI Emerging Market (EM) Index effective June'17 with a lighter than expected pro forma weight of 0.14% (as of 20^th April'17 with prices impacted by Panama Leaks) in the MSCI EM Index contrary to expectations of close to a 0.19% weight as simulated by MSCI in April'16. If market momentum continues, Pakistan should regain weight in line with expectations in the next Semi‐Annual Index Review by MSCI. Additionally, passive fund flow allocation will be at more reflective weights and will likely continue through to the rebalancing of MSCI indexes in Novemver'17. The list of Tier-1 stocks as part of the reclassified MSCI Pakistan Index include: OGDC, HBL, UBL, MCB, LUCK and

ENGRO while 27 other names have been nominated for the small cap index. Pakistan's graduation is likely to have far‐positive implications where apart from increasing foreign visibility, it draws comparisons for multiple re‐rating akin to 2006‐2008. Macros lend further support (broad parallels can be drawn with macroeconomic indicators during the last time Pakistan was part of MSCI EM) where FY17‐18 GDP growth of 5.1%, driven primarily by development initiatives under CPEC, remains well above the EM average of 3.8%, warranting improved valuation. Near term the broader market is likely to focus on the Federal Budget FY18 (expected on 26^th May) where investors should expect targeted expansionary fiscal measures ahead of General Elections in 2018.

Current account deficit (CAD) for April'17 surged significantly to record at US$1.13 billion compared to US$546 million in the preceding month. Despite trade deficit shrinking by 2% on a MoM basis, CAD widened primarily on account of absence of CSF inflows in April'17 (vs. inflows of US$200 million in March'17), further aided by a sequential decline of 9%MoM in remittances. Consequently, the current account deficit for 10MFY17 reached US$7.2 billion (2.3% of GDP), up 205%YoY from US$2.4 billion in the corresponding period last year on the back of 1) rapidly growing trade deficit as imports accelerated (+16%YoY) while exports remained flat and 2) continuous decline in remittances (fall of 3%YoY as compared rise of 5.3%YoY during 10MFY16) on the back of lower inflows from GCC region (62% of total remittances). Moving forward, as trade deficit continues to widen along with a decline in remittances, current account deficit is expected to continue its downward spiral keeping deficit above US$8 billion (2.7% of GDP) in FY17.

In a recent meeting, ECC of the cabinet has decided to increase the quota of urea exports by another 300,000 to 600,000 tons owing to ample amount of urea inventory available in the country. The committee also extended the deadline for urea export to end October'17. Out of initial allocated quota of 300,000 tons, local manufacturers were hardly able to export 40,000 tons of the commodity to East Africa region at an estimated FOB price of US$230‐240/ton. In this regard, despite attractive quota allocation, the recent downtrend in international urea prices (down 30% to US$170/ ton breaking its last summer's low of US$171/ton touched in July'16) limited the attractiveness of exporting the excess urea inventory. In this backdrop, analysts believe urea exports are likely to remain unfeasible at current price levels. FFC is likely to be the most impacted whereas FATIMA remains largely immune given its lowest per bag manufacturing cost.