Pakistan stock market benchmark index up 7 percent in last 15 days

The market continued to build on last week’s rally with the PSX‐100 gaining 1.58%WoW to close at its record high of 36,694 points amid anticipations of reclassification to EM status in MSCI’s annual review next month and global crude venturing near the US$50/bbl mark.

Activity at the bourse witnessed a sharp uptick during the week with daily average trading volume growing to 325.4 million shares up 10.5%WoW. Foreign participation, however remained negative (net basis) with outflows for the week recorded at US$6.98 million, albeit lower than US$12.71 million last week.

Key news flows relating to the broader market were: 1) SBP scheduling release of monetary policy statement on  21^st May (Saturday), 2) GoP rejecting bids in the latest PIB auction as participants bid at significantly higher yields, 3) LSM growth registering at 4.7%YoY for 9MFY16 with Automobiles (+23.43%YoY) and Fertilizers (15.92%YoY) leading the growth, 4) fiscal deficit for 9MFY16 was reported at 3.4% per cent of GDP, and 5) PSO announcing plans to build a refinery valued at US$6 billion to expand into processing crude.

Expected GoP’s revenue generation measures for Budget FY17 including: 1) enhancement of FED on beverages and cigarettes, 2) imposition of 10% sales tax on branded milk and 3) increase in tax to 17% for other dairy products and levying of sales tax on all types of meat sold in retail packing, animal feed and seeds used to produce cooking oil.

Scrips leading the bourse were: PPL, MCB, KEL, PTC and HASCOL, while laggards included: NBP, HMB, BAFL, INDU and ASTL.

While political concerns can emerge as PML‐N and opposition continues to lock heads over Panama leaks, the market is likely to remain resilient with short‐term investor interest likely to be guided by the upcoming budget and the outcome of the MSCI EM reclassification review on 14^th June this year. On the global front, commodity price movements can propel performance in related sectors.

With the benchmark index up 7% in last 15 days, you are probably not alone in thinking being caught by surprise. While this performance should be termed no less than stunning, the benchmark is currently touching its highest level. In the backdrop of a looming MSCI decision regarding Pakistan's reclassification as an Emerging Market (EM), market sentiments have shifted from outright confusion (hurried regulatory actions against 'non‐compliant' entities/individuals and political uncertainty) to premature jubilation (anticipation of MSCI's decision in favor of Pakistan). Despite risks, the possibility of EM reclassification along with joint efforts by SECP, NCCPL and PSX to address shortcomings in the system and improve liquidity all together form the perfect catalysts to drive the index towards 37,400 levels at least in the short term.

More recently, the market has also shown a tendency of heating up. However, possible EM reclassification along with stable macros and materialization of energy and infrastructure projects under CPEC should narrow the current discount of 28% of the PSX-100 against the MSCI AP excluding Japan.

Pakistan Stock Market closes above 36,000 level

The benchmark PSX‐100 index continued its winning streak of the last two weeks (gained 2,234pts) to close week ended on 13^th May at 36,122 points (up 0.41%WoW). As opposed to earlier week the index was able to close above the crucial 36,000 level as investors calibrated portfolios in anticipation of Pakistan's inclusion in the Emerging markets club.

Additionally, the Oil & Gas sector was drive by rising global oil prices. Activity at the market remained buoyed with average daily traded volumes rising to 294.5 million shares from 242.3 million shares last week, up by hefty 23%WoW).

Key news flows guiding the market included: 1) semi‐annual index review for MSCI Equity Indices resulting in the addition of 2 scrips (HCAR and PIBTL) and deletion of 4 (ABOT, BAHL, DAWH and HMB) Pakistani companies into the MSCI FM Small Cap Index, 2) Cabinet Committee on Privatization (CCOP) approving divestment of GoP's residual 40.25% Shareholdings in KAPCO, and sale of shares in Mari Petroleum Company, 3) GoP and Italy likely to sign a G2G deal for the supply of liquefied natural gas (LNG) through an Italian firm Eni, 4) Drug Regulatory Authority Pakistan (DRAP) expected to allow pharmaceutical companies to further increase drug prices (up to 15%) with the commencement of new financial year, 5) fertilizer companies slashing prices of urea by Rs60/bag after revision of gas prices and 6) KAPCO securing an upfront tariff of Rs8.1176/kWh for its coal‐fired project with an installed capacity of 660MW.

Gainers at the bourse were: LOTCHEM, ICI, SNGP, HUBC and EPCL, while scrips losing value were: HBL (‐3.8%WoW), NML (‐3.7%WoW), MLCF (‐2.7%WoW) ABL and FATIMA. Volumes leaders were: DCL, TRG, SNGP and KEL. Foreign participation remained under pressure, with foreigners selling US$12.7 million worth equities during the week against net buy of US$21.2 million last week.

Upcoming FY17 budgetary measures (tentative date of release being 3^rd June’16), politically cohesive conclusion of the recent Panama Papers deadlock, and the outcome of the MSCI’s Annual Classification review (announcement scheduled on 14^th June’16) remain major upcoming milestones for equity market. Anticipating MSCI classification review, investors are likely to shift interest to scrips that are likely to enter the EM index, namely LUCK, ENGRO, HBL, UBL, MCB and OGDC.

Pakistan successfully completed staff level discussions for the eleventh review under the IMF Extended Fund Facility (EFF) qualifying for disbursement of US$510 million, subject to approval by the Fund's Board. GoP managed to meet all quantitative criteria for the Jan-Mar 2016 quarter where progress on fiscal benchmarks (9MFY16 tax collection target of Rs2.1 trillion met and budget deficit contained to Rs1.0 trillion) is encouraging. With FY16 budget deficit target of 4.3% of GDP close to be achieved, the GoP will now be eyeing further consolidation to 4.0% in the coming budget. As the program draws to a close, the Fund has highlighted need for continued efforts in key reform areas particularly fiscal management, energy shortages and restructuring of loss‐making entities. The last review for the year ending June'16 is expected in August'16 where the analysts expect GoP to comfortably meet all quantitative criteria, likely to lead to disbursement of the final tranche of US$100 million under the program.

The PkR/US$ has depicted commendable stability in the ongoing financial year averaging Rs104.7 reflecting a marginal decline of 0.05%CYTD against the dollar. This has remained a function of: 1) weak dollar dynamics, down 4.65%CYTD, 2) strong foreign exchange reserves countering BoP weakness and 3) ramp up in the FE‐25 import financing facility (1QCY16 average utilization at US$1,438 million as compared to an average of US$749 million for CY15). Over the immediate term experts see the PkR/US$ parity to remain stable, with projection for interbank rate to average Rs106.2 during remaining months of CY16.

That said, pressure on the Rupee is expected to intensify with the start of next financial years (FY17) on account of: 1) higher inflation and potential reversal in monetary cycle and 2) greater Balance of Payment vulnerability to oil price shock where analysts foresee PkR to depreciate up to 4.0% (against earlier expectation of 2.4%) during FY17/CY17 averaging at Rs108.5/Rs110.1. Foreign exchange reserve stability (before repayments start in May'17) is likely to restrict pressures on the PkR in the coming fiscal year.

Pakistan stock market driven by foreign investors

The bull run continued during the week ended 6th May 2016. The PSX‐100 Index crossed 36,000 mark, yet failed in sustaining this level and closed the week at 35,974 level, up 3.6%WoW, as investors calibrated portfolios in anticipation of Pakistan's inclusion in the Emerging markets club.

Additionally, the index heavy Oil & Gas sector was propelled by strength in global oil benchmarks. While setting aside the political uncertainty arising from revelations included in the Panama Papers, measures to be adopted in the upcoming FY17 budget remain a key consideration in setting investors’ expectations.

News moving the market included: 1) inflation increased to 4.17%YoY during April'16 from 3.94%YoY in March'16, mainly on the back of hike in food, fuel and rental indices, 2) PTA is set to hold auction for Next Generation Mobile Services (NGMS) spectrum (3G) on 11^th June’16 aimed at generating Rs42 billion revenues and 3) the Ministry of Finance has fiercely opposed allocation of gas from Mari field to EFERT, arguing that the fertilizer manufacturer has defaulted on payment of GIDC, whereas the Ministry of Petroleum & Natural Resources is seeking approval for allocating 60 mmcfd to Guddu power plant and 31mmcfd to EFERT.

After rejecting the terms of reference (TORs) put forward by opposition parties, Prime Minister Nawaz Sharif and his legal and political aides agreed to rope in opposition parties in negotiations to draw mutually acceptable terms for the proposed judicial commission to probe the Panama leaks.

Gainers at the bourse were: LUCK, MCB, NML, ICI and PTC, while scrips losing value were: AKBL, LOTCHEM, APL and HMB. Volumes dropped by one percent on week on week basis to 242.3 million shares, where volume leaders were: BOP, SNGP, PTC and TRG. Foreign participation took a healthy turn, with foreigners buying US$21.2 million worth equities during the week against net sell of US$12.4 million last week.

As result season comes to an unexciting close, investors look ahead to flashpoints, particularly upcoming MSCI's Annual Market Classification review (announcement scheduled on 14^th June’16) where Pakistan is hopeful for re‐entry into EM status. Anticipating this, investors are likely to shift interest to blue chip plays, likely to enter the EM index, namely LUCK, ENGRO, HBL and MCB. Furthermore, a rising CPI (April’16 at 4.2%YoY) has set the stage for reversal in the interest rate cycle, with expectations for a tightening to initiate from 4QCY16.

Due to the continuation of bullish momentum at the local bourse, benchmark PSX‐100 index offered return of 3.8%MoM in April'16 rising to 34,719 points, taking CYTD gains to a modest 5.8%. Rallying oil prices along with a strong corporate earnings season where selected sectors (Cements, Autos and Electricity) were seen on top. Average volume for the month hiking by a whopping 61.6% to 235 million shares against last 7-monthth average of 154 million shares. Despite a change for the good in volumes, foreign selling continued to be the itchy point with foreigners selling US$18.1 million worth equities taking CYTD net outflow to US$122 million. As regards sector specific performances, mimicking global oil price trends the Oil & Gas sector was seen taking charge, in what looked like ages, followed by Commercial Banks and Automobiles, while Cements and Fixed Line Telecommunication lagged behind.

Oil & Gas Regulatory Authority (OGRA) on Friday notified 38.3% or Rs76.5/mmbtu decrease in feedstock gas prices for fertilizer sector from Rs200/mmbtu to Rs123.41/mmbtu, in lieu of Rs70/bag agreed reduction in urea prices by fertilizer manufacturers. Following this recent development and significantly lower fertilizer offtake (demand growth revised down to 4.7 million tons from 5.2 million tons earlier) leading to poor 1QCY16 financial results.

Pakistan Stock Market April 2016 Review and Outlook

Pakistan Stock Exchange continued its bullish trend in April’16 and closed the month with benchmark PSX-100 Index touching 34,719 level, posting a decent gain of 5.8 percent.

Rising crude oil prices along with a strong corporate earnings season kept investors interest live in selected sectors (Cements, Autos and Electricity).

Daily trading volumes improved with average for the month rising by a whopping 61.6% to 235 million shares against last 7-month average of 154 million shares.

Despite an increase in average trading volume, foreign selling continued to be the itchy point with foreigners selling equities worth US$18.1 million during April taking CYTD net outflow to US$122 million.

Coming down to sector performances, mimicking global oil price trends the Oil & Gas sector was seen taking charge (up 12.4% MoM) in what looks like ages,  followed by Commercial Banks (up 4.3%MoM) and Automobiles (up 2.6%MoM) while Cements ( down 0.7%MoM) and Fixed Line Telecommunication (down 6.4% MoM) lagged behind. 

For May'16, analysts believe important points to be kept in mind will be: 1) MSCI EM up gradation review drawing closer, 2) upcoming budget proposals and 3) political stand-off between ruling PML-N and opposition parties over Panama investigation gaining strength, all of which can impact market performance.

Remaining dismal for most part of FY16, average volumes improved substantially by 61.6%MoM during April'16. Similarly, average traded value also increased by 34.8%MoM to US$97.6 million during the month review as compared to US$72.4 million during March'16. While local participation remained healthy with NBFCs, Banks and Mutual funds buying US$44.15 million, foreigners remained net sellers with US$18.1 million.               

The index heavyweight Oil & Gas sector turned out to be the best performer, gaining 12.4%MoM during April'16 as oil prices rallied on account of a weak dollar and eroding stockpile.

With market participants remaining hopeful for an inclusion into the MSCI EM Index, analysts expect market to continue depicting strong performance in May'16. That said, particular consideration should be given to upcoming budget proposals and the political stand-off over Panama investigation, where any adverse development can affect market's performance negatively.

Pakistan Stock Market closes the week at 8-month high

The benchmark of Pakistan Stock Exchange, PSX-100 Index finally came out of its consolidation phase and closed at an 8-months high (also CY16’s high) of 34,719 level. During the week ended 29^th April, the Index rallied on the back of oil prices and stronger corporate profitability reported in the ongoing result season.

After an extended period of risk-off sentiment, investor’s confidence recovered in spite of heavy foreign selling (US$12.40 million during the week) resulting in higher volumes touching 242 million shares compared to 239 million shares during a week ago. Leaders during the outgoing week included: NML, OGDC, HBL, FFBL and SNGP while laggards included: PSMC, PTC, KAPCO, AKBL and PSO.

Key developments during the week included: 1) fertilizer companies turned down the GoP’s proposal to bring down prices of urea by Rs200/bag, however they agreed to reduce the price by Rs60/bag, 2) ECC is likely to direct an additional 60mmcfd to Engro Fertilizers (EFERT) from Mari gas field, 3) he federal cabinet approved Budget Strategy Paper for FY17 with a target to spend Rs1.497 trillion on development, reduce fiscal deficit to 4% of GDP, increase economic growth rate to 6.5% and limit inflation to 6%, 4) according to Finance Minister the circular debt is to be cleared by July this year and 5) Super Tax to be imposed on rich individuals, association of persons and companies having over Rs500 million for another year.

The continuation of market’s bull‐run, up 13.6% from CY16 low is hinged upon a number of events including 1) movement in crude oil prices which is widely expected to run out of steam due to oversupply, 2) heightened political risks associated with burgeoning pressure from the opposition with regards to Panama Leaks investigation (though that seems highly unlikely due to lack of proper legislation pertaining to this investigation), 3) upcoming budget proposals and 4) possible inclusion of Pakistan in MSCI Emerging Markets. However, analysts believe that current rally may extend in the upcoming week as bulls continue to outweigh bears in spite of the persisting risks.

AKD Securities in its project has forecast the CPI to rise 1.4%MoM, implying inflation at 4.03%YoY in April’16 as compared to 3.94%YoY recorded in the previous month. This is expected to be an outcome of recent uptick in both Food and Fuel prices coupled with periodical rise in the Housing, Education and Clothing Indices. This implies 10MFY16/4MCY16 CPI average of 2.78%YoY/3.83%YoY. NFNE Core inflation is also projected to rise to 4.8%YoY during April'16 taking 10MFY16/4MCY16 average to 4.13%YoY/4.56%YoY. Going forward, CPI is likely to tread up as Ramadan effect propels food prices and rising crude oil prices translate into higher domestic energy costs. Consequently, FY16/CY16 CPI inflation is expected to average at 3.05%YoY/4.5%YoY. Expectations for any further easing have faded with secondary market yields ascending sharply post April'16 monetary policy announcement where bond yields have risen 34bps on average since. Within this backdrop analysts reiterate a nominal hike in 4QCY16 on higher inflation expectations and potential currency weakness if crude oil prices continue to escalate.

National Bank of Pakistan (NBP) has posted below expectations consolidated profit after tax of Rs4.02 billion (EPS: Rs1.89) for 1QCY16 as compared to net profit of Rs3.89 billion (EPS: Rs1.83) for 1QCY15, up by a nominal 3%YoY. The deviation from the projections came from higher than expected expenses of Rs11.7 billion against an estimate of Rs10.1 billion. Sequentially, there a sizable 48%QoQ decline in earnings  primarily on the 50%QoQ/30%QoQ drop in capital gains/fee income alongwith 24%QoQ decline in net interest income. The 1QCY16 result highlights included: 1) a 7%YoY increase in NII, 2) provisions going down to Rs917 million during the quarter from Rs3.1 billion for the corresponding period last year, 3) a 23%YoY/29%QoQ drop in non-interest income amid lower capital gains, utilizing Rs1.46 billion in the quarter under review against Rs3.49 billion in same period last year, 4) a 4%YoY increase in expenses. While NII came down by 24%QoQ, a key positive feature of NBP’s 1QCY16 earnings performance is the improvement in asset quality. However, a sustainable improvement, in this regard, is necessary to ascertain quality earnings.

Maple Leaf Cement Factory (MLCF) announced its 3QFY16 results posting profit after tax of Rs1.16 billion (EPS: Rs2.20), up 28%YoY from net profit of Rs911 million (EPS: Rs1.73) for 3QFY15. Pre-tax earnings grew significantly by 54%YoY due to a strong domestic demand and lower energy costs. However, significant increase in effective tax rate kept the earnings on a lower side.  As a result, the earnings were lower than the forecast of Rs2.35/share in spite of higher than expected topline and gross margins (GMs). This took 9MFY16 earnings to Rs3.51 billion (EPS: Rs6.64), 49%YoY higher than Rs2.35 billion (EPS: Rs4.44) for 9MFY15. Result Highlights included: 1) topline grew by 13%YoY due to stronger domestic demand, 2) GMs improved by 709bps YoY to 42.81% led by lower coal price, 3) finance cost declined by 57%YoY due to early debt repayments and lower interest rates and 4) increase in tax liability due to greater profits and relatively higher effective tax rate of 38% as compared to 25% in 3QFY15.

Luck cement (LUCK) announced its 3QFY16 results posting profit after tax of Rs3.36 billion (EPS: Rs10.39), down 9%YoY from net profit of Rs3.70 billion (EPS: Rs11.45) for 3QFY15. Apart from higher tax expense denting the bottomline, profitability improved during the period where PBT grew by 13%YoY for 3QFY16. Nonetheless, the earnings were in line with analysts’ forecast of Rs10.61/share. As a result, 9MFY16 earnings rose by a meager 3%YoY to Rs9.61 billion (EPS: Rs29.73) from Rs9.30 billion (EPS: Rs28.77) for 9MFY15. Result highlights included: 1) topline dropping by one percent YoY due to flatter dispatches and 1%YoY/7%YoY lower local/export retention prices, 2) GMs expanding by 282bps YoY to 48.81% led by lower coal and  furnace oil price, recent addition of 5MW WHR and shift of lost exports to premium priced domestic market, 3) distribution cost reducing by 39%YoY due to 47%YoY decline in exports and 4) tax expense jumping due to higher effective tax rate of 31% compared to 14% in 3QFY15. The other factor attracting attention of investors included: 1) land acquisition for Greenfield cement plant in Punjab and contract with equipment supplier expected to be finalized by the end of June this year, 2) financial close of 660MW LEPCL is expected to be achieved by August this year and 3) a 50MW Wind Farm likely to commence commercial operations by the end of June 2016.