Pakistan Stock Market April 2016 Review and Outlook

Pakistan Stock Exchange continued its bullish trend in April’16 and closed the month with benchmark PSX-100 Index touching 34,719 level, posting a decent gain of 5.8 percent.

Rising crude oil prices along with a strong corporate earnings season kept investors interest live in selected sectors (Cements, Autos and Electricity).

Daily trading volumes improved with average for the month rising by a whopping 61.6% to 235 million shares against last 7-month average of 154 million shares.

Despite an increase in average trading volume, foreign selling continued to be the itchy point with foreigners selling equities worth US$18.1 million during April taking CYTD net outflow to US$122 million.

Coming down to sector performances, mimicking global oil price trends the Oil & Gas sector was seen taking charge (up 12.4% MoM) in what looks like ages,  followed by Commercial Banks (up 4.3%MoM) and Automobiles (up 2.6%MoM) while Cements ( down 0.7%MoM) and Fixed Line Telecommunication (down 6.4% MoM) lagged behind. 

For May'16, analysts believe important points to be kept in mind will be: 1) MSCI EM up gradation review drawing closer, 2) upcoming budget proposals and 3) political stand-off between ruling PML-N and opposition parties over Panama investigation gaining strength, all of which can impact market performance.

Remaining dismal for most part of FY16, average volumes improved substantially by 61.6%MoM during April'16. Similarly, average traded value also increased by 34.8%MoM to US$97.6 million during the month review as compared to US$72.4 million during March'16. While local participation remained healthy with NBFCs, Banks and Mutual funds buying US$44.15 million, foreigners remained net sellers with US$18.1 million.               

The index heavyweight Oil & Gas sector turned out to be the best performer, gaining 12.4%MoM during April'16 as oil prices rallied on account of a weak dollar and eroding stockpile.

With market participants remaining hopeful for an inclusion into the MSCI EM Index, analysts expect market to continue depicting strong performance in May'16. That said, particular consideration should be given to upcoming budget proposals and the political stand-off over Panama investigation, where any adverse development can affect market's performance negatively.

Pakistan must address structural issues on top priority

Historically Pakistan and International Monetary Fund (IMF) has lived with each other, at times with comfort and at tome with some unease. While the IMF role as ‘lender of last resort’ has helped Pakistan in overcoming economic malice, the loan covenants are often seen by Pakistani’s rather stringent.

Ideally the ruling regime in Pakistan should be more careful in formulation of policies and implementing these in letter and spirit but the overall impression is that the successive governments sooner or later suffer from complacency. It may also be said that political agenda pushes economic agenda in the back ground. Many analysts strongly believe that condoning deviation may not be difficult had appropriate efforts were made. In other words these deviations are the result of not following the ‘IMF Recipe’.

A team of AKD Securities, Pakistan’s leading brokerage house, recently met the IMF Regional Representative for a discussion on Pakistan’s progress on the macro front in the context of the ongoing EFF program. After the meeting it has also released a report that has many takeaways.

While progress on reform agenda so far remains commendable, continued reform implementation post completion of the program was stressed, where energy crisis and low revenue collection continue to rank as high priority issue areas.

The IMF, though cognizant of likely delays, sees room for steady structural changes even post completion of the program based on higher GoP resolve. Benefits of low oil prices and earlier reforms have placed Pakistan in a macro sweet spot with economic indicators marking record levels.

Agreeing with the IMF, AKD team believes this opens room for addressing deeper structural issues that can help Pakistan sustain recent economic gains where key reform areas highlighted were: 1) exports sector revival, 2) tax base expansion and 3) efficient expenditure and resource allocation between federal and provincial governments.      

Key takeaways

Priority on energy and revenue: Key issue areas for reforms that retain the highest priority were Energy and Revenues expansion – both resonated by all participants. Resolution to the country’s energy problems was highlighted, particularly in the context of its impact on industrial growth. Also, revenue collection remains equally crucial where considerable focus should be directed towards structural changes both through a) regulatory/legislative action and b) operational changes in FBR/tax collection mechanisms.

Privatization to slowdown: The privatization program remains on agenda, however it is likely to stretch beyond the current program as political opposition in PIA’s strategic divestment and labor union concerns in case of DISCOs continue to be major hurdles. That said, recent road shows for DISCOs’ sell-off were regarded as a key positive. Analysts expect revision of current timeline in the upcoming IMF review report for December 2015. Moreover, with the current government resorting to populist decisions in the run up to next general elections (expected 2018), the brokerage house highlight heightened risks to PSE sell-offs.

Another program unlikely: With the current program effectively concluding in June 2016, rollover to another program remains unlikely on account of Pakistan’s stable Balance of Position position. However the Fund is likely to remain engaged in a consultative process with the GoP to monitor current program objectives, though without imposition of conditions/targets.

CPEC – lack of clarity lingers: The Fund views the landmark China Pakistan Economic Corridor (CPEC) agreement as largely positive, though details on nature of agreements remain sketchy and are yet to be factored in fiscal expectations/targets. Alongside, infrastructure projects need for investment in export oriented sectors was also noted. 

Is World Economy Trapped in Death Spiral

Let me first of all refer to a news item that CNBC has reported. It says the global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market. It also says that some analysts have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S. The other explanations include:

1. U.S. dollar has risen by around 20 percent against a basket of currencies.
2. Crude oil prices have tumbled by around 70 percent since the middle of 2014.
3. The dollar would weaken in 2016 and that oil prices were likely bottoming, potentially providing some light at the end of the tunnel.
4. The forecast reflects expectations of gradual improvement in countries currently in economic distress.
5. The various factors would lead to significant and synchronized' global recession and a equity bear market.
6. The silver lining is that the world economy will grow by 3.4 percent in 2016 according to the International Monetary Fund.

These are the excerpts from a report from the developed world prepared by the wiz kids. However, a person like me who belongs to the third world could only laugh at the amateurish approached of a leading international broadcaster.  I would term it ‘an attempt to mislead the audience’ as the media houses operate on the advice of ‘lobbyists’.

To substantiate my point it suffices to say that the global media has been talking about declining number of oil rigs in the US but oil output does not show any corresponding reduction, on the contrary output is on the rise. Reportedly number of active rigs has come down to less that from peak of over 1600.

Lately the World Bank has also warned that global growth rate would come down due to ongoing wars in the Middle East. Interestingly the developed world pushes the countries into proxy wars and then basing these create huge and cry about plunging economies.

I will conclude on the point that the US and Saudi Arabia were partners in taking oil prices to record high and now the animosity between the two is responsible for the rock bottom prices.

Previously the wars were fought with arms but now countries are subjugated by destroying their economies. The most glaring example disintegration of USSR and other living examples are Iran, Iraq, Libya, Nigeria and Sudan.

The moral of the story is that the death spiral is in nobody's interest but rational behavior, most likely, will prevail over. But the broadcaster has shown only one side of the coin. Now it is up to the audience and readers to find out the motives of super powers, their modus operandi and above all the disinformation spread to mislead the people, especially those who are being exploited.