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.

Pakistan Stock Market Receives Higher Foreign Investment

During the week ended 29^th July 2016, the benchmark of Pakistan Stock Exchange PSX-100 closed at 39,529 levels – marking another record high level as results season commenced this week. Average daily trading volumes tapered slightly during the week to 182 million shares as compared to slightly more than 207 million a week ago. Foreign participation improved with an inflow of US$10.94 million as compared to an outflow of US$11.5 million a week ago. Leaders at the bourse were SHEL, NCL, LUCK, NML and ABL; while laggards included POL, PSMC, PPL, OGDC and EPCL. Volume leaders were DCL, AGL, SNGPL, DFML and TRG.
Key news flows for the week included: 1) SBP scheduled to announce its first monetary policy review on 30^th July, 2) the GoP and IMF commenced staff level discussions for the twelfth and last review under the EFF program, 3) Pakistan and Russia to start negotiations for laying 1,100km LNG pipeline with an estimated cost of US$2 billion next week where the first phase of the project is scheduled to complete by December next year, 4) ECC allowed BAFL to remit US$27.2 million to set up branch in UAE, 5) DRAP approved price increments for scheduled drugs, non‐scheduled drugs and lower priced drugs under the Drug Pricing Policy and 6) Mari Petroleum’s Managing Director stated that the company plans to establish a 400MW power plant at Dharki/Sadiqabad with an estimated cost of US$400 million.

The key event to track for next week will be the monetary policy announcement on the weekend. The expectations remain split between status quo and 25bps reduction in the policy rate. CPI inflation for July’16 to be released next week will also help to set expectations for further monetary policy action. Earnings season is likely to be the guiding factor over the near term with key results likely to be announced in the coming month. On the global front the further decline in international crude oil prices can keep the pressure on the Oil & Gas sector.

Reflecting a slowdown in revenues and tighter gross margin (GM), EFOODS is likely to post profit after tax of Rs793 million (EPS: Rs1.04) for 2QCY16 earnings, down 13%YoY/28%QoQ. This will effectively take 1HCY16F earnings to Rs1.90 billion (EPS: Rs2.48) as against Rs1.97 billion (EPS: Rs2.58) for 1HCY15. In this regard, intensifying competition in the dairy sector is likely to lower revenues by 6%YoY and remain flat sequentially. GM is also anticipated to take a hit (expected to go down by 140 bps YoY in 1HCY16F) on account of higher raw milk prices in lean season. Going forward,the pace of earnings growth is likely to come off for EFOODS (3-year earnings CAGR of 11%) where volume saturation in the industry along with recovery in dairy prices poses downside risks to earnings. Analysts believe price performance will more be a function of EFOODS' performance ipost acquisition by Royal Friesland Company.

The listed banking sector has shed 14.9% CYTD struggling on account of lower interest rate with reversal expectations now pushed forward beyond 1HCY17. Banking spreads continue to remain at their multi‐year lows, while advances growth has also failed to pick up any significant pace. In addition, the continuation of super tax is another impediment in earnings growth in an already challenging operating environment. These factors are likely to manifest in the upcoming 1HCY16F results where analysts expect earnings surprise can come from higher utilization of capital gains (as seen in 1QCY16) and lower than expected credit costs (particularly in case of National Bank of Pakistan). In the backdrop of lower earnings expectations, analysts continue to look favorably towards fundamentally resilient HBL and UBL, based on: 1) a superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability to capture CPEC related investments.

Are India Pakistan likely to fight another war on Kashmir?

This morning when I went though Pakistan’s leading English newspaper Dawn, two headlines gave me jittering feeling Kashmir can never become part of Pakistan, Sushma tells Nawaz and Waiting for the day Kashmir becomes Pakistan: Nawaz.

This prompted me to once again read one of blogs http://shkazmipk.blogspot.com/2013/02/kashmir-can-initiate-third-world-war.html posted as back as in February 2013. Its caption was ‘Kashmir Can Initiate Third War’. I still remember many of my critics termed this absurd.  Despite lapse of three years, I stand firm on my words that the Kashmir dispute is not over land but water. The conclusion was based on the overwhelming perception that the third war will be fought over water.

I subscribe to the theory that British Raj prevailed over the world following ‘divide and rule’ policy, which is being followed by the US now. British Raj had left two scars on this planet, Kashmir and Palestine, which are oozing blood for more than six decades.

While going through local and international publications and watching leading English TV channels, I get a feeling that the arms sellers are creating new conflicts to initiate wars. I read a news item with profound grief about the killing of over 80 Hazaras in Afghanistan. Publications are filled with rising tension between India and Pakistan, Afghanistan and Pakistan and Iran and Pakistan. I often wonder is the ground being created for some proxy wars in the region.

I strongly believe that any encounter between India and Pakistan could prove disastrous because both the countries now suffer from war mania, may be because they suffer from complacency of being ‘an atomic power’. Dropping a few atomic bombs may be too easy and the objective could be achieved in few minutes. However, do the war mongers ever bother to understand the devastating effects of this adventurism?

Pakistan stock market closes week almost flat

For the week ended July 22, 2016 the benchmark of Pakistan Stock Exchange PSX-100 closed almost flat as compared to a week ago. The market managed to close above 39,000. However, the overall performance was not disappointing. CYTD returns were reported at above 19 percent. Additionally, the month to date foreign inflow of US$31.7 million is a strong indicator for foreign investments picking pace, following Pakistan’s re‐entry into the EM club.

News flow impacting market during the week included: 1) in the T‐Bill auction conducted on Wednesday, cut‐off yields for 3, 6 and 12 months posted decline, where banks aggressively participated in the auction with bids amounting to Rs740.9 billion against the target of Rs200 billion, 2) net inflow of almost $600 million from China, foreign direct investment (FDI) in Pakistan surged 38.8% as Pakistan received FDI of US$1.28 billion during 2015-16, which was US$358.2 million higher than receipts a year ago.The unusual jump in FDI in the last month of 2015‐16 was on the back of an inflow of US$138.5 million in the telecommunications sector, 3) SECP has formally sent the final draft of the Companies Bill, 2016 to the Ministry of Finance for initiating necessary legislative process and its approval by the Parliament and 4) Textile exports went down by one billion dollars during last financial year due to massive decline in cotton crop production and slowdown in the economy of China pushing Pakistan's textiles and clothing exports to US$12.45 billion during FY16.

Leaders exhibiting performance over the week were: ASTL, NCL, and PSMC (+7.1%WoW), while laggards were FFBL, DAWH and HASCOL. Average daily traded volume grew by 7%WoW to 207 million shares, where SNGP, DFML and PAEL were the volume leaders.

Considering the stellar run‐up in the last quarter of the outgoing FY16 gaining 10.7% during the period), analysts expect the market to enter a consolidation phase. Directionless trading in the absence of major triggers may prevail. Market participants are advised to closely follow: 1) political developments as the opposition plans to protest against inaction on Panama leaks investigations, 2) fertilizer offtake numbers for the month of June'16, gauging the sensitivity of recent subsidies on demand and, 3) details of GoP policy measures in response to the final meeting with the IMF over the release of EFF's last tranche (negotiations start July 27th). Additionally, earnings announcement may fuel strong sentiment for consensus beating stocks.

Firming up in June'16, the global commodity index rose by 3.5%MoM. While losing some ground on account of Brexit and a strengthening US$ as a consequence, oil prices consolidated around US$48/bbl whereas prices of coal were up 6.4%MoM on supply disruptions in major markets and cotton witnessed easing supply concerns depicted strength during the month under review. Steel and Urea prices declined on account of excess supplies amid a weak demand outlook. While recovery has been steady during June’16, most commodity prices still remain at their multi‐year lows. Analysts expect prices to consolidate going forward; however a sustainable reversal of the downtrend remains contingent on an improving demand scenario.

Current Account deficit for June'16 was recorded at US$61 million lower than US$252 million in June'15 (US$792 million in May'16) where higher trade deficit was countered by healthy remittance flow for the month was US$2.07 billion, up 13.8%YoY. This implies, FY16 current account marking a deficit of US$2.52 billion, lower 6.8%YoY reflecting: 1) expanding trade deficit, up +8%YoY as weak exports restricted savings from oil imports, 2) steady remittance inflows (up 6.4%YoY) and 3) US$713 million CSF payments. Going forward, analysts expect slight pressures to mount and project current account to post deficit of US$5.1 billion in FY17 with trade deficit increase of 11%YoY: on 1) US$45/bbl assumption for crude oil and 2) limited recovery in exports on low cost competitiveness. However, positive surprises can emerge if CSF payments materialize (US$900 million approved for next year) and on higher than expected growth in remittances.