Supreme Court verdict stays short of disqualifying Pakistan Prime Minister Nawaz Shari

Supreme Court verdict stayed short of disqualifying Pakistan Prime Minister Nawaz SharifIn a split 3-2 decision, the Supreme Court (SC) while forming a Joint Investigation Team (JIT) stayed short of disqualifying the Prime Minister (PM) in the eagerly awaited Panamagate decision on Thursday, allowing the PM to continue holding office.

The JIT [to be comprised of one senior official each from the FIA, NAB, SECP, SBP, ISI and MI] has been tasked to investigate offshore assets [incl. money transfer to Qatar] of the PM’s family.

In this regard, the SC also ordered PM Nawaz Sharif, and his sons Hasan and Hussein to appear before the JIT.

The JIT will be formed in the next 7 days and has also been ordered to present a report every two weeks before the five-judge SC bench and conclude the investigation in 60 days.

Our take

The efficacy of the agencies represented in the JIT to conduct an independent investigation against a sitting PM is going to be challenging, in our view, as some of these agencies have reportedly expressed an inability to conduct an inquiry citing various reasons such as immunity of public office holders, lack of evidence, legal jurisdiction, etc.

At the same time, the plaintiffs will also have to produce a new set of supporting evidence as the ruling deems the current evidence to be inconclusive. This can be challenging for both the plaintiffs and the JIT to complete the investigation in the stipulated 60 days.

Market Reaction

The market has reacted positively (KSE100 up 3.85% intra-day to close with a gain of 2.57%) as the delay in the Panamagate verdict had clearly been an overhang on market sentiments (momentum which picked up in the closing months of 2016 petered out with the KSE100 marginally down 0.4%CY17TD).

In this backdrop, daily value traded is materially down to average US$113.7mn in Apr’17-to-date compared to US$274.4mn in Jan’17 and to its 6 months average of US$194.87mn.

The market has been in a consolidation mode (down ~3%) since the verdict was reserved on Feb 23’17. In this regard, the benchmark has regressed from  close to +2 standard deviation towards +1 standard deviation (vs. the one year moving average) in the review period.

With political uncertainty now relatively lower, we expect the market sentiments to improve with focus now being upon the upcoming MSCI EM inclusion and Budget FY18. In this backdrop, we recommend a thematic exposure in front line Banks (double digit loan growth from CPEC related activities expected to counter pressure from a relatively lower interest rate environment) with UBL (fwd. PB/PE 1.6x/9.7x) as our preferred pick, OMCs (robust volumetric growth as the industry prepares to increase storage) with HPL (CY17/18F PE of 19.6/15.1x) as our preferred pick in the space, Cements (double digit domestic demand growth with a vibrant private construction environment) with LUCK (FY17E PE 20.01x) as the preferred pick and Autos (healthy order book indicating steady demand, ability to increase prices) with INDU (FY17E/18F PE of 11.4/11.0x) making the cut in the auto space. 

Upcoming Checkpoints

·         Formation of JIT in next 7 days with investigation to be concluded in 60 days

·         Inclusion in the MSCI EM space in May’17 where Pakistan is slated to have a weight of around 19bps

·         Federal Budget FY18 expected to be announced on May 26’17. This would be the last budget of PML-N before general elections in May’18

·         Major political parties are expected to kick-start their election campaigns shortly

Panamagate Recap

·         Prior to the closing of hearing (reserved since Feb 23’17), the Supreme Court heard petitions in the Panama Papers leaks case filed against PM Nawaz Sharif, his family members and others.

·         To recall, the Panama Papers leaks in Apr'16, showed the Sharif family's connection to offshore entities registered in tax havens with assets vastly exceeding legal income sources.

·         No offshore company in the Panama Papers is in the name of Nawaz Sharif or his brother Shahbaz Sharif, Chief Minister of Punjab.

·         However, several entities are listed in the names of the PM’s three children, Mariam, Hasan and Hussain, who were owners or had the right to authorize transactions.

·         That being said, the PM and his children are accused [in the Panamagate case] of money laundering and owning offshore assets without disclosing the source and trail of funding.

·         The opposition led by the PTI (ruling party in the province of KPK, second largest party in opposition) began a spate of protests, threatening a street movement to force PM Sharif to face a proper inquiry over the claims in the leaks (ended on Nov 1’16 as the Supreme Court announced to hear multiple petitions in the case).

·         The delay in announcing a verdict had been due to the unavailability of SC judges hearing the case as they were in different registries of the SC.

A report by Pakistan’s leading brokerage house, AKD Securities

US peacekeeper or conflict creator

One can deduce a few conclusions even by having a cursory look at the prevailing conflicts:

1)     conflicts are generated to create hegemony

2)     hegemony is established to get control over natural treasures

3)     natural resources are controlled to make the rich richer and the poor poorer

4)     worst crimes are committed in the name of conflict resolution

This raises a question is US a peacekeeper of conflict creator?

Keeping in view the prevailing conflicts, I am compelled to arrive at the conclusion that the US is conflict creator. To support my hypothesis, I will talk about:

Middle East and North Africa (MENA) inferno

Beginning from Iraq’s attack on Iran in seventies and on Kuwait in nineties the prime motive has been to control energy reserves. Iraq could have not done this without the patronage of the US. A look at the present day conflicts in Yemen, Bahrain, Somalia and Libya are the effort by the US to get control of oil and gas reserves of the region. Flaring animosity between Saudi Arabia and Iran and involving them in proxy wars is also part of the US policy to retain its hegemony in the region.    

Ongoing war in Afghanistan

The US managed to disintegrate USSR by prompting it to get access to warm waters. However, even after disintegration of USSR the war continues in Afghanistan. Be it tribal bouts or proliferation of extremism the local population continues to suffer from acute shortage of food and devastated infrastructure. The presence of NATO troops in Afghanistan raises the suspicion that they are not there to maintain peace but supervise cultivation of poppy.

Pakistan-India conflict

There can’t be two opinions that if Pakistan and India join hands, South Asia will become the most prosperous region. The area is rich in food, natural resources and makes the biggest market of the world. At the time of departure British Raj left a thorn, Kashmir. Since independence both the countries have been billions of dollars for the procurement of arms but bulk of the population continues to live below the poverty line.  

Iran-Saudi Arabia hatred

Both the countries are oil rich and have huge per capita income. While Saudi Arabia is often accused of towing the US foreign policy, Iran has been declared part of axis of evil. Both the countries have been involved in proxy wars, only to make them weaker. Saudi’s have been brain washed and made to say “Iran is a bigger enemy as compared to Israel”.

Growing US naval presence in Indian Ocean

The US has the largest and most equipped navy. It also has presence in all the occasions. It has major concentration in Indian Ocean, through which bulk of the trade and energy passes. Indian Ocean also connects two of the most important straits of Hormuz and Malacca.  

Efforts to choke straits of Hormuz and Malacca

The US has been making desperate efforts to get control over these two most important straits. However, in Hormuz it faces resistance from Iran and in Malacca from China. Since Iran and China are actively involved in oil trade, both have been supporting each other. Prior to Islamic revolution Iran had been towing the US foreign policy agenda but now it is considered the worst foe. China is one of the biggest trading partners of the US; the memories of cold war era are still fresh.

I am sure my critics may term my narrative ‘diabolic thinking of a citizen of third world country’. I will still say that all the conflicts around the world are created by the US to initiate proxy wars, sell arms and getting control over bounties of the nature.  

Pakistan Stock Market witnesses over 37 percent decline in daily traded volume

Trading at Pakistan Stock Exchange (PSX) remained lackluster for the large part of the week. During the week ended 7^th Aptil’17, the benchmark index closed at 48,156 points with average daily turnover during the week falling 37.36% WoW to 155.75 million shares. Volume leaders during the week were:  ASL ANL, BOP, BYCO and TRG. Key news flows during the week were: 1) headline inflation for March’17 rising to 4.94%YoY, 2) GoP raising petroleum prices, 3) INDU unveiled investment plan of Rs3 billion for debottlenecking of its paint shop, 4) IMF concluded its consultation with GoP, opining cautious stance on fiscal and external account while maintaining 5% GDP growth target, 5) Commerce Minister hinting disbursal of the first installment under the Rs180 billion textile package shortly and 6) SSGC approved  Rs64.9 billion additional gas pipeline development project to transfer 1.2bcfd RLNG from Bin Qasim to Sawan  with expected COD October’18. Stocks leading the bourse were: SSGC, INDU, MEBL, LUCK, and HCAR, while laggards were: NBP, NCL, AICL, ENGRO and SNGP. Foreign interest was positive during the week with net inflow of US$9.25 million compared to US$19.04 million net outflow a week ago. With high political uncertainty and delayed in implementation of in‐house financing product, market is expected to remain under pressure. However, commencement of results season may lend some support to the market. On the global front, recent U.S missile attack at Syria escalated tensions in the Middle East can that is likely to push crude oil prices higher, which can lend support to market.

The IMF recently concluded its Article IV staff‐level discussions with Pakistan, adopting a cautious tone on the country's ability to sustain recent macroeconomic gains. While similar to earlier reviews lagging fiscal and reform implementation efforts were counted as potential disruptive factors, looming external account threats also became a highlight. In this regard, the Fund has sharply increased its FY17 current account deficit projection to 2.9% of GDP (1.2% of GDP in FY16) on weak trade dynamics. On the fiscal front, GoP is expected to miss its deficit target of 3.8% of GDP with IMF forecasting the same at 4.1% owing to slow revenue collection (Rs2.2 trillion in 9MFY17 against Rs3.6 trillion target for FY17). Urging fiscal consolidation and greater tax collection, the Fund has also highlighted lack of progress on structural reforms in the energy sector. On a positive side, GDP growth for FY17 is expected to rise to 5.0% as compared to 4.7% for FY16 on CPEC led investment. IMF has appreciated controlled inflation levels, though advising a prudent monetary stance keeping in view fiscal and external risks.

Due to high political uncertainty, Pakistan market witnessed 0.8% MoM erosion during March'17, trimming down its CYTD return to a mere 0.7%. While foreign selling continued unabated during the month (FIPI outflow of US$22.8 million in March'17), participation of local players also remained lean, with volumes coming down by 31%MoM. Buying activity of Mutual Funds came down to around US$19.1 million as compared to US$47.9 million and US$44.1 million in February'17 and January'17). Banks and Individuals sold US$16.1 million and US$35.1 million worth of equities respectively. Barring Textiles, all main-board sectors posted negative returns with the highest decline seen in Cements and the index heavyweights Oil and Gas and Commercial Banks. Going into April'17 is likely to hold key importance in determining the market's direction. In addition, other points of significance include: 1) foreign flow trend a month prior to inclusion in MSCI EM index next month, 2) commencement of results season, 3) preliminary budgetary news flow and 4) inflation number this month to set the tone for interest rate hike during the year. 

Upsides in HASCOL are due to superior volumetric growth (CY17‐21 CAGR of 9.7%)  outpacing the industry, with requisite CAPEX dovetailing an aggressive retail push (adding 16 pumps per quarter for CY16) and storage infrastructure (planned addition of 350,000MT operational by 1QCY18). In this backdrop, AKD Securities has raise its CY17‐19 earnings by 11%, on the back of revised volumetric growth and increasing long term CPI assumption to 4%. However, with ambitious growth targets, the risks from a volatile oil price environment and associated inventory losses are hard to rule out. Ramping up of supply is also expected to strain liquidity while a commensurate increase in below the line expenses may drag profitability. Compared to listed peers, HASCOL’s books have better liquidity with room available to handle planned CAPEX. At current levels, the market seems to be under pricing growth.

Pakistan Stock Market Remains Lackluster

Trading at Pakistan Stock Exchange remained lackluster evident from benchmark index sliding by 1.7%WoW and closing the week at 48,156 points. The average daily trading volume also declined by 3.5%WoW to 248.7 million shares.The lack of investors’ interest can be attributed to political volatility and absence of market triggers. News flows for the week included: 1) SECP in its press release dated 29th March apprised that its constituted committee (for reviewing in‐house financing) had submitted a report which focused on introducing reforms in Margin Financing (MFS) to improve banks' funding to investors through brokers, 2) GoP released total Rs505 billion (63% of total Rs800 billion allocated) inclusive of Rs122 billion from foreign aid, 3) GoP allowed PTA to auction a next generation mobile services (NGMS) license with a base price of US$295 million from the frequency spectrums left unsold in the previous two auctions, 4) NML announced selling of 40% stake of its auto assembling business to the Japanese giant Sojitz Corporation and 5) OGRA proposed an increase of POL products for April. Stocks leading the bourse include: SHEL, MTL, ASTL and MEBL, whereas laggards were: HASCOL, AKBL, KEL, NML. Volume leaders were: BOP, ANL, KEL and ASL. Headline inflation is expected to guide expectations for monetary policy and may trigger a rally in banks. Additionally, the much awaited outcome of Panama case hearings could alleviate political pressures.

Circular debt and overdue receivables remain a usual element in cash strapped liquidity dynamics for the power sector. Taking a comprehensive approach, AKD Securities map the timeline of developments and quantum of circular debt build up since the one‐time clearance of Rs480 billion in June 2013. Its analysis show that in a large number of cases the GoP has been asked by independent arbitrators (foreign and domestic) and high courts to clear the pile‐up. This perception gains further strength based on increasing reliance on IPPs in power generation mix particularly in the backdrop of 10,663MW of gross capacity additions coming online by CY20. Also, with its political agenda hinging on resolving the prevailing power deficit of over 5,000MW, it is believed that a limited clearance of overdue payables to them is more likely. The Rs48 billion being claimed by 13 IPPs currently is a minor hiccup whereas IPPs with planned CAPEX outlays have increased pressure to free up liquidity tied in GoP receivables (case in point being HUBC where the room for leverage falls from Rs71.7 billion in FY16 to Rs27.8 billion in 1QFY17 and Rs1.8bn in 2QFY17).

Inconsistent with previous month's improved performance, Pakistan’s exports remained lackluster in February 2017, declining by 8.0%MoM/8.6%YoY to US$1.64 billion. Total exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors amounting to US$318.9 million and US$995.3 million, sliding 12.7% MoM/24.6%YoY and 6.5%MoM/2.7%YoY respectively. On a cumulative basis, 8MFY17 textile exports were 1.6%YoY lower at US$8.23 billion, largely contributed by 9.2%YoY decline in the low value segment diluting the impact of 1.6%YoY growth in the value added segment. Contrary to expectations, inclusion in zero rated regime and recently announced export incentive package worth Rs180 billion (textile sector's share estimated at close to 90%) has so far failed in generating positive momentum in export trend, giving way to fresh concerns regarding the export‐oriented industry's competitiveness over regional players. Going forward, analysts expect textile exports to remain under pressure due to: 1) weak Chinese demand outlook and concerns of economic slowdown in the European Union following Brexit and 2) lack of currency competitiveness. Moreover, continuous rise in international and local cotton prices has also aggravated concerns about textile industry.

ASTL has recently raised its re‐bars prices per ton by Rs2,000 (up 2.5%) to Rs79,000 likely due to: 1) increase in scrap steel prices and 2) rise in Chinese re‐bar prices due to higher domestic demand as a result of improvement in Chinese property sector and continuous decline in steel production. The recent price increase is likely to improve the bottom line. That said, current re‐bar prices still remain below FY16 average of Rs83,000/ton resulting in reduced gross margin/earnings for FY17F. While the upcoming expansion is to aid earnings growth, analysts believe the current price level is already reflects that.