Pakistan Market: Daily trading volume up 35 percent

The benchmark of Pakistan Stock Exchange PSX-100 resumed its pre-Brexit bullish momentum after Eid holidays, touching an all-time high to close at 39,188 level, up 3.7%WoW. As concerns eased slightly, the market was further supported by additional stimulus announced by Japan and stronger data from the U.S. coupled with recovery in crude oil prices, all favorable for the local bourse. Overall activity at the market improved drastically, average daily traded volume for the week increased by 35.5%WoW to 193.8 million shares.

 Key news flows during the week included: 1) Privatization Commission approved offloading of the government remaining 40.25% stake in KAPCO and Expressions of Interest from prospective bidders was invited, 2) three foreign investors including Shanghai Stock Exchange (SSE) have expressed interest in acquiring a stake of up to 40% in the Pakistan Stock Exchange, 3) total deposits of the banking industry crossed Rs10 trillion as of Jun'16 , up 10%YoY as compared to Rs9.14 trillion at the end of last financial year, 4) GoP announced a plan to lay an oil pipeline from Gwadar to China for the export of crude and task given to state construction firm Frontier Works Organization, and 5) GoP raised over Rs236 billion through auction of PIBs with cut-off yields for 3, 5 and 10-year papers declining noticeably.

Performance leaders during the week were: HASCOL, INDU, PIOC and SNGP; while laggards included: EFOODS, ABL, KAPCO and FATIMA. Volume leaders during the week: KEL, SNGP, DCL, EFERT and TRG. Foreign participation improved significantly where net inflow during the week amounted to US$21.4 million as against net outflow of US$1.2 million in last five sessions.

The market is still likely to come under pressure due to the global developments but analysts believe it could sustain current levels over the short term. Support should come from results season commencing next week where major sectors are expected to post strong earnings performance. However, risks for a pullback will linger in the form of: 1) political developments gaining prominence, 2) oil price swings likely to impact the local market, 2) another rate cut in the upcoming monetary policy proving negative for banking scrips. On the global front, upcoming US FOMC meeting and development on UK‐EU negotiations need to be tracked with implications for growing participation.

The IMF recently released its staff level report for the second last review under the IMF EFF stressing the country to continue structural reforms beyond the program's conclusion. Commending Pakistan on its strong performance on the program so far, the report also reiterates largely positive macro outlook though risks remain in the form of weak trade dynamics, policy slippages and political noise. With only one review left, IMF has added two structural benchmarks related to energy sector namely: 1) KAPCO's sell‐off and 2) updating plan for the resolution of circular debt. The twelfth review entailing disbursement of US$100 million is scheduled for end‐Sep'16 where successful achievement of targets would mark the conclusion of the facility ‐ the first for Pakistan. In line with our expectations, GoP will not be entering a new IMF agreement owing to stable external metrics however, GoP is expected to remain engaged in a consultative process with the IMF though without imposition of targets.

Pakistan stock market coming out of Brexit syndrome

As the fears of Brexit started easing benchmark of Pakistan Stock Exchange, PSX‐100 Index managed to close at 37,784 for the week ended on Thursday. Friday was a holiday on account of last Friday of Holy month of Ramadan.

Foreign selling also continued, though with much lesser magnitude reported at US$3.61 million during the week as compared to US$20.56 million a week ago. Ramadan factor eclipsed MSCI EM upgrade as the benchmark index barely crossed pre‐MSCI level of 37,518.

Average daily traded volumes fell by 8%WoW to 143 million shares as compared 155 million share due to trading curtailed to four day. Leaders during the week under review included FATIMA, HCAR, DAWH, AICL and ABL, while laggards included MTL, NML, AGTL, FFC and FFBL.

Key developments during the week included: 1) Ogra recommending an upward revision in per liter prices of HSD by Rs3.75 to Rs79.27 and motor gasoline petrol by Rs1.93 to Rs66.20, despite crude oil prices easing in the international markets, 2) ADB approving a US$600 million loan to help Pakistan roll out major structural reforms to improve the performance and financial sustainability of its PSEs, 3) the book‐building process for the IPO of TPL Properties has raised Rs696.8 million at the strike price of Rs12.50/share, 4) LSM posting a growth of 3.92%YoY in the 10MFY16 reflecting a partial revival in the industrial output, and 5) KEL submitting a Multi‐Year Tariff petition with Nepra seeking an increase in tariff by Rs0.66/unit in the name of O&M component for ten years commencing from July 1, 2016 to June 30, 2026 and has also sought a change in claw‐back formula threshold.

Though Brexit fears eased in the outgoing week, volatility is expected to remain relatively higher due to unfolding developments in the process. Nonetheless, re‐rating associated with the MSCI EM upgrade will likely provide impetus to the Index. Additionally, the end of Ramadan will mark return of volumes out of dormancy to normal levels. Keeping in view marker dynamics analysts recommend taking new positions in main blue chips that will likely make way into MSCI EM list that OGDC, HBL, MCB, UBL, LUCK, ENGRO, FFC, HUBC and PSO.

Latest banking sector data released by State Bank of Pakistan for May'16 indicates that banks' balance sheet continued to grow at strong levels, up 19%YoY, to Rs12.1 trillion. While private sector credit growth has not been substantial on account of bank's continued preference for risk‐free government securities (banks' lending to government grew by more than 29%YoY in May'16, posting growth of 8.2%YoY in May'16 alone. However, consumer financing grew by 9.3%YoY to 7.7% of the private sector loans as banks look to re‐focus on high margin auto finance and personal loans in the current lower inflationary environment. Spreads are likely to bottom out on possible monetary tightening in CY17. Analysts retain our liking for banks that offer: 1) superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability and reach to capture CPEC related investments.

Corporations that Control World

On June 13, 2016 "Information Clearing House" has posted a list of surprisingly small number of corporations that control massive global market shares. How many of the brands below do you use? Please take some time to go though the list by clicking this link http://www.informationclearinghouse.info/article44864.htm

Allow me to say that these corporations control assets bigger than many countries have and therefore these entities enjoy the power to install and topple governments in many countries.

Is Pakistan inching towards isolation?

On June 19, 2016, I posted a blog titled "Need to revisit Pakistan's foreign policy". My concluding remarks were, “It is feared that tweaked foreign policy is pushing Pakistan towards isolation. It may be true that Pakistan enjoys geopolitically important position but it has not been able to take advantage of its location. 

Pakistan needs a vibrant foreign policy and a young and more articulated full-time Foreign Minister. The current advisors are part of past legacies and also see the world with tinted glasses”.

Many of my critics termed this a sweeping statement as they still insist that getting the funds from IMF and other multilateral donors is an evidence of the commitment of these institutions towards Pakistan. This support would not have been there had the lenders didn’t have confidence in the ruling junta and economic potential of the country.

My immediate and most candid reply is, “These institutions are there to bail out countries which even face more precarious economic outlook as lending is their business. These institutions never allow any country to commit default. They lend only that much which is enough for the survival of the borrowing countries but the policies are never aimed at making these countries financially strong.

Since the readers are not ready to spend more than a few minutes, I have the following brief assertions to make in support of my apprehension that Pakistan is inching towards isolation. I also believe that many readers may not agree with my inferences but I am sure it can start a healthy debate and let those at the helm of affairs to revisit the policy and come up with a more articulated one.

1-     Since independence Pakistan’s foreign policy has remained under the foreign policy of the United States. As a result Pakistan never enjoyed cordial relations with the then USSR and Russia of today.

2-     Over the last four decades Pakistan has been fighting a ‘Proxy War’ in Afghanistan. This can be divided into two phases. In the first phase Pakistan along with Taliban fought a war with USSR that was termed Jihad. In the second phase, starting in 2001, Pakistan has been fighting a war with Taliban, a friend turned foe.

3-     Pakistan has earned hate from various Afghans groups, Taliban as well as Northern Alliance. This paved way for India to enter Afghanistan as a facilitator. The recent alliance of Afghanistan with Iran and India is not liked by the hawks present in Pakistan.

4-     Since independence in 1947 Kashmir has remained the biggest thorn in normalizing relationship between Pakistan and India. They have fought three wars and both the countries have attained the status of atomic powers. Every year both the countries spent billions of dollars on the purchase of lethal armaments, only to attain supremacy on each other.

5-     After the Islamic revolution in Iran Pakistan’s relationship with the country went into the shadow of foreign policies of United States and Saudi Arabia. Despite the lifting of sanction imposed on Iran, Pakistan has not been able to trade with Iran. It has not even succeeded in establishing banking links, a prerequisite for normalizing international trade between the two countries.

6-     China is often termed time test friend of Pakistan and has been supporting the country in overcoming its economic problems, the latest being CPEC. However, many groups having vested interest are trying to sabotage the project.

These are just a few bullet points that need an open debate in the National Assembly and Senate of Pakistan. Ironically, the absence of independent ‘Think Tanks’ in the country is a serious problem. It is believed that over 3,000 Think Tanks are operating in the United States, but not even one is operating in Pakistan.