With
announcement of FY18 Deferal Budget and Pakistan’s formal inclusion in the MSCI
EM Index, the week ended 2nd June 2017 remained eventful. Contrary to the expectations,
fiscal prudence superseded election year populist measures in the Budget, while
unexpected tax restructuring for the stock market induced further volatility (15%
CGT regardless of the holding period, enhancement of tax on dividend to 15%).
On the other hand, the transition to MSCI EM Index triggered a sell‐off on the likely
rebalancing of the portfolios. The benchmark of Pakistan Stock Exchange index
lost 4082 points or 7.75%WoW to close the week at 48,555. The average daily
volumes declined to around 295 million shares, but the average traded value
soared to its decade high of over US$240 million. Other key news flows during
the week included: 1) Hussain Nawaz appearing before the JIT, 2) CPI based
inflation in May’17 rising to over 5%, at 30‐month high, 3) GoP reducing the MOGAS/HSD prices, 4) LHC
dismissed petitions filed by commercial importers against the anti‐dumping duty on flat steel
products, 5) MoF reportedly agreed to provide Rs45 billion to IPPs and OMCs in
lieu of circular debt. MSCI Pakistan EM index large and mid‐cap constituents were
major losers during the week, where: HBL, LUCK, UBL, MCB and OGDC.With Pakistan
formally part of MSCI EM Index, analysts expect short‐term volatility to
continue where the market is likely to take guidance from foreign activity.
That said, any development with regards to the revised margin financing product
along with Panama‐gate’s
JIT proceedings are likely to drive sentiments accordingly.
As
eventful as it was, the market gained 2.6%MoM during May'17 in anticipation of
a populist budget while gearing up for Pakistan's formal inclusion in the MSCI
EM index. However, gains remained limited (the market lost 4% since the presentation
of Budget FY18) where, contrary to expectations, fiscal prudence superseded
election year populist measures in
Budget
FY18. Also, an unexpected tax restructuring for the stock market induced
further volatility. On the other hand, the transition to MSCI EM Index triggered
a sell‐off with the
benchmark index losing 1.7%, just a day before formal inclusion of Pakistan in
MSCI EM. In this regard, profit taking was evident in MSCI EM stocks with
traded value recorded at US$508.7 million, touching its decade high. Going
forward, foreign activity is likely to guide the market sentiments in the short
term with the market seeing increased volatility until complete re‐balancing of portfolios.
However, analysts expect key themes like: 1) materialization of CPEC projects,
2) healthy corporate earnings growth, 3) interest rate reversal and 4) the pressures
on the PkR to take center stage until general elections next year.
Despite
widening trade deficit, rising by nearly 37% in 10MFY, focus on export‐oriented sectors remained
missing in the recently announced FY18 budget. While relief measures under the export
package (zero‐rating regime,
discounted EFF & LTTF and duty‐free machinery import) were extended and new protectionist
measures introduced (GST @10% on import of fabric and 5% RD on import of
filament yarn), no solid initiatives were undertaken with regards to energy
subsidy (to reduce power cost) and refund claims except allowing of payment of refunds.
Moreover, the 1% increase in GST on retail sales to 6% further add to the woes
of industry players having a higher
proportion in the local sales mix should they choose not to pass on the cost
increment to consumers.
