Pakistan stock market benchmark index up 7 percent in last 15 days

The market continued to build on last week’s rally with the PSX‐100 gaining 1.58%WoW to close at its record high of 36,694 points amid anticipations of reclassification to EM status in MSCI’s annual review next month and global crude venturing near the US$50/bbl mark.

Activity at the bourse witnessed a sharp uptick during the week with daily average trading volume growing to 325.4 million shares up 10.5%WoW. Foreign participation, however remained negative (net basis) with outflows for the week recorded at US$6.98 million, albeit lower than US$12.71 million last week.

Key news flows relating to the broader market were: 1) SBP scheduling release of monetary policy statement on  21^st May (Saturday), 2) GoP rejecting bids in the latest PIB auction as participants bid at significantly higher yields, 3) LSM growth registering at 4.7%YoY for 9MFY16 with Automobiles (+23.43%YoY) and Fertilizers (15.92%YoY) leading the growth, 4) fiscal deficit for 9MFY16 was reported at 3.4% per cent of GDP, and 5) PSO announcing plans to build a refinery valued at US$6 billion to expand into processing crude.

Expected GoP’s revenue generation measures for Budget FY17 including: 1) enhancement of FED on beverages and cigarettes, 2) imposition of 10% sales tax on branded milk and 3) increase in tax to 17% for other dairy products and levying of sales tax on all types of meat sold in retail packing, animal feed and seeds used to produce cooking oil.

Scrips leading the bourse were: PPL, MCB, KEL, PTC and HASCOL, while laggards included: NBP, HMB, BAFL, INDU and ASTL.

While political concerns can emerge as PML‐N and opposition continues to lock heads over Panama leaks, the market is likely to remain resilient with short‐term investor interest likely to be guided by the upcoming budget and the outcome of the MSCI EM reclassification review on 14^th June this year. On the global front, commodity price movements can propel performance in related sectors.

With the benchmark index up 7% in last 15 days, you are probably not alone in thinking being caught by surprise. While this performance should be termed no less than stunning, the benchmark is currently touching its highest level. In the backdrop of a looming MSCI decision regarding Pakistan's reclassification as an Emerging Market (EM), market sentiments have shifted from outright confusion (hurried regulatory actions against 'non‐compliant' entities/individuals and political uncertainty) to premature jubilation (anticipation of MSCI's decision in favor of Pakistan). Despite risks, the possibility of EM reclassification along with joint efforts by SECP, NCCPL and PSX to address shortcomings in the system and improve liquidity all together form the perfect catalysts to drive the index towards 37,400 levels at least in the short term.

More recently, the market has also shown a tendency of heating up. However, possible EM reclassification along with stable macros and materialization of energy and infrastructure projects under CPEC should narrow the current discount of 28% of the PSX-100 against the MSCI AP excluding Japan.

Selling by foreigners keeps Pakistan stock market under pressure

During the week ended 15^th April benchmark of Pakistan Stock Exchange PSX-100 Index lost its winning streak in the last two sessions. The market closed at 33,767 levels, losing 201 points or down by 0.59%WoW. Strong earnings of refineries and Oil & Gas failed to counter negativity arising from political noise. Turnover once again plunged, with average daily traded volume declining to 190 million shares from 275 million, down by almost 31%WoW.

Key news flows during the week included: 1) Vitol Dubai completed acquisition of around 18 million or 15% of voting shares of HASCOL, 2) joint session of parliament passed "The Pakistan International Airlines Corporation (Conversion) Bill" to convert the national flag carrier into a public limited company, 3) Prime Minister Nawaz Sharif laid foundation stone of two power plants of 660MW in Thar as Sindh provincial government reached financial close of 660MW Thar Coal Power Project, 4) companies from China' western region of Xinjiang signed deals worth US$2 billion, 5) Ministry of Water & Power recommended the GoP to withdraw 3% increase in GST on HSFO being consumed by IPPs, 6) Fauji Foundation expressed interest in purchasing 10% shares of MARI and, 7) Fitch Ratings affirmed Pakistan at 'B' with stable outlook.

Performance leaders during the week were: POL, SNGP, UBL, NCL and AGTL; while laggards included: DAWH, EPCL, PTC, FATIMA and LOTCHEM. Volume leaders were: TRG, BYCO, JSCL, DCL and DCH. Foreign participation failed to sustain last week’s trend where net outflows during the week amounted to US$1.46 million as compared to net inflows of US$27.7 million a week ago.

Led by healthy gains in energy and agricultural crop prices, the global commodity index exhibited strong recovery during March'16, up 7%MoM. Fastest to recover, oil prices led the pack with WTI/Brent gaining 13.6%/7.7%MoM in anticipation of Doha meeting of oil producers for capping the output to contain prevailing glut. Recovery in urea and coal was a function of pick‐up in demand and tighter supply respectively. Barring dairy (FAO dairy index down 8.2%MoM), food‐commodities fared well too with sugar and vegetable oil indices gaining 17.1%MoM and 6.3%MoM respectively. While recovery has been steady in March'16, sustainability of the trend depends on 1) improvement in demand and 2) containment of commodity oversupply. Until then, analysts expect commodity prices to continue to remain weak.

Automotive sales/production was recorded at 17,587/17,424 units in March’16, growing 11%/27%MoM, but down 17%/17%YoY, largely in line with expectation of post‐Rozgar scheme tapered growth scenario. Cumulative, 9MFY16 sales/production remained robust, resting at 166,898/167,217 units increasing 35%/35%YoY, driven by hogher offtake from PSMC (100,663 units sold, rising 51%YoY) and INDU (47,504 units sold, rising 18%YoY). The 800cc and below 1000cc segment exhibited 49%YoY growth during 9MFY16 (53,715 units sold, led by Mehran and Bolan), followed by the 1000cc segment rising 34%YoY (18,609 units sold, mainly due to the increase in Cultus sales and the 1300cc and above segment increased by 17%YoY (64,882 units sold with 20%YoY growth in Corolla sales). LCV sales outpaced the passenger car segment, where 9MFY16 sales were recorded at 29,692 units, an increase of 62%YoY, accentuated by Rozgar scheme driven offtake. Analysts remain bullish on local OEMs as new entrants remain few and far.

FCCL is scheduled to announce its 3QFY16 results on 18^th April’16. Analysts forecast the company to post net profit of Rs1.41 billion (EPS: Rs1.02) during 3QFY16, up 44%YoY. They expect this improvement in earnings to emanate from: 1) stellar growth in topline (+13%YoY to Rs5.01 billion) backed by 17%YoY increase in dispatches and 2) flatter cost of sales. In this regard, the low cost is likely to result from lower energy costs (average coal price down by 23%YoY), employment of 10MW WHR that came online towards the end of FY15 and cheaper in‐house power generation. As a result, Gross Margins are expected to go up by an impressive quantum to 44.35% in 3QFY16 from 36.74% in 3QFY15. Bottomline is expected to be further bolstered by decline in finance cost by 44%YoY owing to long‐term debt repayments. On a cumulative basis, analysts expect 9MFY16 earnings to grow to Rs4.19 billion (EPS: Rs3.04) compared to Rs2.65 billion (EPS: Rs1.92) for 9MFY15, up 58%YoY. Despite robust returns, analysts believe FCCL is still an interesting investment proposition due to its combination of growth and value characteristics.

Contrary to the expectations, State bank of Pakistan chose to keep policy rate unchanged at 6.0%, prompted by concerns on: 1) reversal in inflationary trends and 2) declining exports and increasing non‐oil imports making the current account more vulnerable to oil price shocks. That said, positive macro trends following earlier monetary easing were also highlighted with uptick in private sector credit and LSM growth at 4.1%YoY during 7MFY16 being notable improvements. Going forward, inflation is expected to accelerate as food prices pick up near Ramadan/Eid season. FY16 CPI inflation average is projected at 3.0%YoY while NFNE Core inflation is expected to average 4.2%YoY. Under the prevailing conditions analysts do not see room for further easing where probability for a modest hike before CY16 end due to external side risks, primarily: 1) chronic exports decline, 2) exchange rate volatility and 3) possible decline in foreign exchange reserves of the country.

Pakistan equity market driven by rising oil prices

During week ended 18th March benchmark PSX-100 Index gained 411 points or 1.126%WoW to close at 33,080 points. The rally was driven by two factors: 1) corporate restructurings (divestments in EFOODS, EFERT, and acquisition of NIB) and 2) crude oil prices registering upward move. Material disclosures of corporate actions by ENGRO were received positively by investors. Foreign participation failed to sustain the trend (US$4.1 million inflows) witness a week ago where net outflows during the week amounted to US$7.6 million.

Key news flows for the week were: 1) US Fed maintained interest rate policy, while expressing concerns about global economic outlook adopting a dovish stance on future rate hikes, spurring performance in emerging market equities, 2) GLAXO announced details of its Sindh High Court approved divestment of its Consumer Health Care operations, with investors getting 10 shares for every 3 shares held in the parent entity, 3) HTL expressed its intention to apply for an OMC license from OGRA expanding into the retail fuels segment, 4) Auto Policy dominated news reports with conflicting details regarding greater incentives for domestic assemblers and, 5) National Assembly passed the Futures Market Bill, 2015 and Financial Institutions (Recovery of Finances) (Amendment) Bill, 2015 in a bid to promote investment avenues and facilitate recovery of bank loans.

Stocks exhibiting strong performance during the week included PPL, INDU, UBL and 4) KEL; conversely laggards were BAFL, HMB, MEBL and HCAR. Average daily turnover was down by a mild 4.76%WoW closing at 166.8 million shares. The volume leaders were NIB, KEL, BOP and TRG.

Approval of the Auto Policy (which has experienced its fair share of delays) may spur performance if planned incentives to current players are enacted. Strengthening commodity prices boosted largely by weakness in the US$ (Dollar Index down 1.8%WoW) are expected to follow through in the coming week. The central bank is scheduled to issue Monetary Policy Statement next week where a further easing remains unlikely.

Despite tapering input costs improving liquidity, burdensome overdue receivables in the power sector continue to plague HUBC's balance sheet, signified by: 1) Rs66.9 billion in overdue receivables from WAPDA & NTDC, down 18.6%YoY but up 6.4%QoQ, 2) increased reliance on short term borrowing where a 46.4%YoY and 57.3%QoQ jump in short term borrowing was witnessed during 1HFY16 and 3) decline in receivables failing to keep pace with declining revenues, raising Days Receivables to 271 days vs. 211 days for the corresponding period last year. On the other hand, a slide in payables (overdue payables to PSO recede 26.5%YoY, rising 6.8%QoQ) has improved the current ratio slightly. That said, income from Laraib and PCE + Bonus payments from the base plant continuing to drive payouts (making up Rs4.24/share of the Rs4.5/share payout declared in 1HFY15). Upcoming payments for new ventures include outlays for 660x2MW coal fired expansion and acquisition of 9.6% stake in SECMC, and a two month time period provisioned between receipt of term sheet from lenders and declaration of financial closure, analysts expect initiation of equity outflows worth Rs5.87 billion (at 49% equity stake on 80:20 leverage) from 1QFY17.