Pakistan market witnesses 23 percent increase in daily traded volume

The week ended August 05, 2016 was a volatile week as the benchmark PSX‐100 Index declined marginally to 39,390 levels. The decline was initially led by the banking sector in the backdrop of status quo in the monetary policy followed by selling pressures particularly in Cements on anticipated weaker dispatches attributable to Ramadan/Monsoon season slowdown effect. The point worth mentioning is that average daily traded volume increased by 23%WoW to 225 million shares. Leaders during the outgoing week were: PSMC, BAFL, KEL, SHEL and ICI, while laggards included: LUCK, PIOC, MLCF, KAPCO and MEBL.

Key developments during the week included: 1) Market Treasury Billions cut‐off yield posted a modest gain despite SBP maintaining interest rate unchanged, 2) Finance Minister and SBP governor alluded that there is no further IMF program under consideration, 3) PSMC announced increase in prices of its vehicle variants by 3% per unit in an attempt to maintain its profit margin, 4) Headline inflation rose by 4.12%YoY during the first month on the current financial and 5) SBP kept policy rate unchanged in its latest monetary policy statement.

Although, PSX‐100 Index is hovering near its highest levels, it is expected to remain volatile due to: 1) increase in political heat as opposition parties plan countrywide protests against the government, 2) weaker anticipated earnings in current result season owing to super tax and 3) volatile oil prices in spite of oversupply/surplus inventories. Financial result announcements of index heavyweights i.e. MCB, ABL and EFERT in upcoming week will likely to plunge Index downward on account of expected decline in earnings as a result of the imposition of super tax and impact of negative sector‐specific factors.

Recovering from initial Brexit shocks with major global economies vowing to unveil stimulus measures to boost economic growth, international equities rebounded sharply during the previous month with MSCI EM Index returning 4.9%MoM. In tandem, PSX‐100 Index closed the month 4.6%MoM higher at 39,529 points, just falling short of the 40,000 level. Volumes also depicted a healthy trend growing 9.8%MoM to average at 189.3 million shares during the month. MSCI led foreign interest was evident in July with foreigners buying equities worth US$26.8 million against a net selling of US$2.02 million a month ago (excluding foreign participation in EFERT divestment), building positions in Banks, Cements and OMCs. Amongst the main board, Automobiles and Parts, Cements and Commercial Banks garnered traction while Healthcare Services along with Multi‐utilities in the sideboard were key performers. Going forward, market's performance in Aug'16 is likely to be guided by the ongoing result season where we see strong earnings performance by Cements & Textiles. Banks are also expected to remain in the limelight with UBL's above expected 1QCY16 earnings setting the tone for the rest of the sector. That said, political pressures can come to the fore with opposition parties (PTI and PAT) likely to stage anti‐ government protests during the month.

In continuation of what has been a persistent trend now, Pakistan exports remained lackluster in June'16, declining to US$1.65bn. Similarly, FY16 exports were recorded at US$20.85 billion, marking a decline of 13%YoY from US$23.94 billion posted in the FY15. The fall came primarily on the back of a slowdown in textile and other commodity related sectors with textile and food group slipping by 8%YoY and 13%YoY respectively during the year. Going forward, despite anticipated weakness in Pak Rupee, analysts expect textile exports to remain under pressure primarily on: 1) slow Chinese demand, 2) adverse exchange rate limiting GSP plus benefits, 3) concerns of an economic slowdown in EU following Brexit and 4) low cotton production, down by 34%YoY.

Brexit keeps Pakistan market under pressure

To begin with, it may be true that the local equity market remained under pressure due to Brexit, which was an overreaction. The decision by the public is yet to be approved by the British parliament. It will be a long drawn process but meantime the business will continue ‘as usual’.

The panic trickling down to Pakistan Stock Exchange plunged the benchmark PSX-100 index to 37,390 levels, down 3.58%WoW, after losing 1,412 points intraday. Regional markets also witnessed similar trend while crude oil tumbled, along with other commodities on a stronger dollar.

Barring Friday, lack of triggers kept market activity dull during the week where average daily volumes declined by more than 15%WoW to 155.7 million shares. Foreign participation remained under pressure, with foreigners selling equities worth US$20.6 million during the week against a net buy of US$19.58 million last week.

Key news flow impacting the market included: 1) National Assembly finalizing amendment in 2016 Finance Bill, 2) Current Account deficit for May’16 rising US$792 million as against a surplus of US$23 million a month ago, 3) the World Bank approving US$1.02 billion in developmental loans for Pakistan under the CGDPF and Sindh Resilience Project, while ADB approved US$100 million loan for the construction of Shorkot‐Khanewal section of the M4 motorway, 4) yields slipping by 3‐ 5bps in the latest Market Treasury Bills auction with the GoP raising Rs138 billion and 5) news source indicating rise in petroleum prices in the range of Rs1.75‐Rs4.5/ltr for July’16. Leaders at the bourse were: MTL, FATIMA, HMB, FCCL and AGTL; while laggards included: BAFL, MCB, AICL, NML and NCL. Volumes leaders were: KEL, DCL, PAEL and DFML.

Bouts of volatility are likely to be witnessed in the week ahead as investors react to uncertainty in the global outlook following ‘Brexit’. Negative implication for the bourse can also emanate from any extended downside in commodities, particularly crude oil. With volatility in major currencies, Autos on (JPY) and Textiles (on EUR and GBP) could see further downside.

After recording surplus for three consecutive months, current account balance returned to the red zone in May'16 recording a deficit of US$792 million expanding, consequently, 11MFY16 current account deficit to US$2.48 billion, up 1.2%YoY higher than the balance in 11MFY15, primarily reflecting a worsening trade deficit. The trade data depicts 22.6%YoY widening in the trade deficit in May'16 as rising imports (up 7.6%YoY) added to the burden of declining exports (down 6%YoY). With similar trends to continue analysts expect current account deficit to further deteriorate. Resulting pressures on current account and hefty debt repayment in FY17 can likely have spillover effects on the Pak rupee exchange parity. However, rising foreign exchange reserves and improving foreign investment outlook should keep erosion in rupee value limited.

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.

State Bank of Pakistan keeps interest rate unchanged

State Bank of Pakistan (SBP) chose to keep policy rate unchanged and the announcement came through a Press Release. The announcement was disappointing because the business community was expecting a reduction of 50 basis points, at least. This perception emerged after the recent decision of Reserve Bank of India (RBI) to cut the policy rate.

RBI decision was in line with the policy of many central banks around the world and also the US Fed which deferred increase in policy rate due to faltering domestic as well as global economy. All the central banks are curtailing policy rates to boost their economies. One completely fails to understand the logic behind not reducing the rate, especially after the constitution of a new Monetary Policy Board at the central bank.

According to the central bank all the key indicators hints towards improving state of the economy of the country. However, it also warns about the future challenges that include stagnant growth of exports, looming energy crisis and subdued GDP growth rate.

Earlier, many of economic analysts were shocked to read a statement of Finance Minster that the country no longer needs the help of International Monetary Fund (IMF). They could recall a report on Bloomberg that Pakistan was inching towards default due to non-sustainability of its debt servicing obligations.

It may be true that he was upset due to inclusion of the names of sons of Prime Minister Nawaz Sharif in the list of Panama Leaks. But no one expected that he could go insane and say that Pakistan does not need the IMF.

Next General Elections are due in 2018 and it was expected that the incumbent would prefer to maintain even more cordial relationship with the IMF but spending more money on developmental programs for boosting confidence of its vote bank.

Pakistan needs to boost its GDP growth rate and the IMF has rightly suggested focusing on improving supply side. This demands spending more on creation of productive facilities and improving capacity utilization of existing manufacturing facilities. Curtailing developmental expenditures is likely to further widening of ‘confidence deficit’ being faced by the PML government.