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.

Is pre Doha meeting oil rally sustainable?

On Tuesday oil breached US$43 a barrel. Brent was up 50 cents at $43.33 a barrel at 0842 GMT and earlier in the session reached a 2016 high of $43.53. WTI gained 39 cents to $40.75 a barrel.

The price movement is being attributed to the hopes being attached to an upcoming meeting of oil producers. The overwhelming perception is that the producers will agree on the measures to tackle the prevailing glut. The perception is also supported by a weak U.S. dollar and further signs of improving oil demand in China.

Many members of OPEC plus outside producers such as Russia are meeting in Doha, Qatar, on Sunday to discuss freezing output. However, two of the largest oil producing countries i.e. the US and Iran will not be taking any part in the deliberations.

As I have in my previous blogs the three largest oil producers/exporters Saudi Arabia, United States and Russia are not willing to contain output. They are insisting that Iran must also freeze output at January 2016 level. The logic is totally illogical.

In fact all the oil producing countries have succeeded in increasing their output after the imposition of economic sanctions on Iran. Therefore, Iran’s point carries weight that let it first regain its lost share and only then it would be willing to talk about containing its output.

There are growing fears that the upcoming meeting will prove a non-event as the three largest oil producers/exporters will not be ready to relinquish their market share to Iran.

  

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.

State Bank of Pakistan should reduce interest rate

State Bank of Pakistan (SBP) is scheduled to announce its Monetary Policy Statement on this Saturday (April 9th). While analysts are making all sorts of speculations certain quarters insist that SBP should reduce interest rate by 50 basis points at least. This demand is being raised after Reserve Bank of India (RBI) announced to cut the benchmark repurchase rate to 6.5 percent from 6.75 percent, the lowest since March 2011. This decision has been made despite many odds only to creating more room to face the upcoming challenges.

The options, in terms of priority, being talked about in Pakistan are: 1) maintaining status quo, 2) an increase and 3) a reduction. Some analysts fear that most probably the newly constituted Policy Board may opt for increasing the rate by bowing down before the IMF pressure. The effort will be to avoid any criticism by the lender of last resort, which is yet to release the last tranche. Keeping the IMF happy is most important because the incumbent government will have to enter into another agreement to meet its debt serving obligations.

To be honest I am fascinated by the decision of RBI chief of reducing the rate, though it may be termed notional. The logic being offered is simple, accelerating the GDP growth rate. He is not following any rocket science but the footsteps of many central banks, even the US Fed is not convinced about the interest rate hike.

The chief stated categorically that the stance of monetary policy would remain accommodative and RBI would continue to watch macroeconomic and financial developments with a view to respond with further policy action as space opens up. The present RBI chief has cut rate five times since January 2015. His option for further easing is limited due to the risk of a third straight year of below average rainfall.

It is true that pressure from the IMF is mounting on Pakistan for missing some key targets and the country may face even more stringent conditions under the new arrangements. However, the incumbent government has to come up with some home grown solutions rather than following IMF recipe blindly. This demands reduction in interest rate to facilitate fresh investment, creation of new jobs and above all improving Pakistan’s competitiveness in the global markets. The cost of doing business has to be brought down.

The cost of doing has to be brought down by reducing interest rate, bringing down electricity and gas tariffs and above all coming up with ‘business friendly policies’. The incumbent government has been enhancing tax on everything rather than catching tax evaders. Energy crisis is the outcome of blatant pilferage and non-payment of bills by certain groups.

Pakistan’s economy is plunging deeper into crisis and needs ‘out of box policies’. The focus must shift from collecting revenue to creation of new production facilities and jobs. Following the IMF recipe will not bring the country out of vicious circle of borrowing. The pace of economic activities has to be accelerated by bringing down cost of doing business and reduction in interest rate is the first step.

Are Pakistani politicians the only corrupt?

After having read the latest news about wealth of Pakistani politicians kept abroad I am neither surprised nor dismayed. Over the years many people in the country have highlighted this issue and some were even assassinated as the politicians never wanted this Pandora’s Box to open. One can still recall the statement of a famous columnist of Dawn newspaper who had once said ‘all are thieves’. A storm was created in a cup of tea and soon business was run as usual.

My own analysis of the situation is that around the world many politicians who are corrupt are made part of ruling junta because internal and external forces pick them to follow an agenda. History is full of such names but even a closer look at some of the politicians who were termed ‘corrupt’ was picked up, groomed and assigned specific tasks. Once the ‘mission’ was accomplished each one faced a fate as described by the spy agencies and underworld ‘eliminate an agent when he becomes redundant’.

I will begin the analysis from my own country, Pakistan. I will not talk about history spread over more than six decades but the present situation. Nawaz Sharif and Asif Ali Zardari, the chives of country’s two leading political parties have been accusing each other of corruption. Many references were filed and cases were brought to the apex courts but neither was convicted.

Three military dictators, installed by external forces were also not spared. The external forces bribed the dictators for towing their policies. These developed countries, who claim to be the champions of democracy kept them in power to attain their ulterior motives. One can say with reasonable confidence that the amounts they received from the super powers were also kept outside Pakistan.

The most notorious name of recent history is Saddam Hussain of Iraq, who fought war with Iran, after the Islamic Revolution for a decade and also attacked Kuwait. Once he became redundant he was hanged and no one has any clue of his wealth kept outside Iraq.

One just can’t ignore Anwar Sadat of Egypt; he played a key role in recognition of Israel by many Muslim countries after ‘successful’ negotiation at Camp David. Once the objective was achieved he was assassinated while taking salute on the National Day.

Many mysteries are associated with the sudden death of Indian Prime Minister after Tashkent Agreement, assassination of Sheikh Mujeeb-ur-Rehman soon after creation of Bangladesh, killing of King Faisal of Saudi Arabia by his own nephew after formation of OIC, shooting of Indian Prime Minister Indra Gandhi by her own guard after Shimla Agreement, assassination of Benazir Bhutto and alleged ‘judicial murder’ of Zulfikar Ali Bhutto.

One has all the reasons to believe that the rulers are installed, toppled and even assassinated by the super powers to achieve their vested interest. They use different jargons for bringing the select in power and get rid of them in the name of ‘regime change’. The only regret is that the champions of democracy indulge in these ‘dirty politics’ but people of their own country hardly raise voice against them.

Declining fertilizer sale in Pakistan

Fertilizer sales continued downward trend during first two months of calendar year 2016. Reportedly offtake during these months was exceptionally low. While urea sales plunged to 656,000 tons (down 40%YoY), total fertilizer offtake was 982,000 tons (down 228%YoY). The declining trend in sales is attributable to lower crop prices (depressed agricultural commodity cycle) and weather-related crop shortfalls resulting in low farmer income.

According to the latest figures released by NFDC, cumulative fertilizer offtake during the Feb'16 was recorded at 491,000 tons as compared 606,000 tons in Feb'15, a decline of 19%YoY. Specifically, urea sales during Feb'16 have declined to 315,000 tons from 340,000 tons in Jan'16, down by 7%MoM/31%YoY.

On the other hand, DAP sales showed strength, registering an increase of 12%YoY to 71,000 tons and 9%YoY to 148,000 tons in Feb'16 and 2MCY16 respectively, however remaining lower by 7%MoM.

Imported urea sales went down by 98%YoY/87%MoM to only 1,533 tons in Feb'16 on account of weak demand and increase in production from the local players particularly EFERT and FFC that enhanced their production levels by 16%YoY to 172,000 tons and 70%YoY to 209,000 tons respectively.

Near-term checkpoints for the fertilizer industry remain: 1) international pricing dynamics where urea prices are down 26%FYTD to currently stand at US$236/tons, 2) Upcoming kharif season to drive demand and 3) increase in local gas prices (expected in Jun'16). In this regard, with no major volumetric growth in CY16, depressed farmer income and weak pricing power does not bode well for the sector.

Urea market share FFC (26%), EFERT (41%) and FATIMA (5%) in Feb'16. FFC sold 146,000 tons (down 21%YoY0, EFERT sold 128,000 tons (down 13%YoY) and FATIMA sold 15,000 tons (down 50%YoY) of urea. With the month under review remaining slightly better for DAP offtake, FFBL sold 24,900 tons of DAP (up109%MoM) while imported DAP sales rose by 33%YoY to 46,400 tons, however, declined by 28%YoY. After a sluggish start in CY16, NP and CAN sales improved to 36,700 tons and 52,400 tons respectively in Feb'16. 

Weak demand on account of poor farm incomes and increase in production from local players has led to high inventory levels in the system. In Feb'16 inventory levels for Urea (800,00 tons), DAP (269,000 tons), CAN (306,000 tons) and NP (180,000) tons. Consequently, end of Feb'16 inventory levels were relatively high for all four basic types of chemical fertilizers. In this backdrop, fertilizer producers are offering hefty dealer discount to clear out huge stockpile of inventory, affecting their margins.

In line with market volatility and depressed fertilizer outlook, the sector shed 14.2% CYTD. With little respite in sight for global commodity prices along with depressed farmer incomes, analysts believe the country's urea demand in CY16 is likely to fall to as low as 5.2 million tons. This alongwith inability to pass on any sharp increase in cost from further gas tariff rationalization (expected in Jun'16) given the continuously narrowing gap between local and international prices is likely to keep price under pressure.

Poor commodity prices, rising gas price, declining urea international prices, high carryover stock