OPEC an impotent entity

OPEC, which pumps about 40 percent of the world’s oil, is scheduled to meet in Vienna on 2nd June to assess its output policy. The group is unlikely to set a production target as it sticks with Saudi Arabia’s strategy of squeezing out rivals such as higher-cost shale drillers.

Gone are the days when OPEC, led by Saudi Arabia enjoyed power to control oil price. Now it is desperately trying to retain its market share by pumping as much oil as possible. It has fallen in the trap of United States, which pampered the kingdom to raise oil price to facilitate shale oil production.

After having achieved the status of largest oil producing country, the US no longer to handhold Saudis, in fact by lifting sanctions imposed on Iran, Saudis feel the real pinch. They know Iran is adamant at attaining its pre-sanctions output. Saudi’s suffering from myopia are unable to read writing on the wall.

There can’t be any doubt that surge in supply of shale oil has reduced Saudi ability to balance crude markets. To be honest Saudis just can’t play any balancing role because of fear of loss of market share. In the past OPEC’s practice was to vary output to manage crude prices.

Market forces are too strong now, and you can’t play against those. Crude has surged more than 80 percent from a 12-year low earlier this year on signs the global oversupply will ease amid declining output in Nigeria and non-OPEC countries including the U.S.

Experts estimate current global inventories at about 5 billion barrels oil, including crude in floating storage, and say the market is oversupplied by about 1.5 million barrels a day. Just to cut production by 1.5 million barrels a day and the next day the price goes up and the other producers will take the whole share -- there is no benefit for OPEC in that.

High oil prices in recent years were an incentive for many high-cost fields to be tapped. If shale oil companies were to collapse due to financial strain imposed by low prices, this might cause another crisis like the one in 2007 and 2008, as many of them owe large debts to banks.

Pakistan stock market closes the week almost flat

The benchmark of Pakistan Stock Exchange PSX‐100 Index closed flat for the week ended 27^th May at 36,694. The index returns underperformed the region by 2.40% due to heavy‐weight sector banking’ disappointing run amidst unexpected 25bps cut in policy rate by the State Bank of Pakistan (SBP). This also caused average daily traded volumes to plunge by 23%WoW to 249 million shares as compared to 325 million shares exchanging hands a week ago.

Though, foreign selling continued, it stood at US$3.81 million as compared to US$6.98 million a week ago. Leaders during the outgoing week included: HASCOL, PSMC, DAWH, SNGPL and ENGRO, while laggards included: MCB, MEBL, EPCL, HBL and SSGC.

Key developments during the week included: 1) MCB said to be in preliminary non‐binding discussion with Fullerton Financial Holdings for a possible merger with NIB, 2) GoP decided to increase PSDP outlay by 11% for FY17 to Rs1.675 trillion from current year’s allocation of Rs1.514 trillion, 3) GoP likely to increase the tax on dividend income to 20% for non‐filers while 15% tax on dividend income for return filers and it may also start charging advance tax on the alternate corporate tax, 4) SBP slashed the policy interest rate by 25bps to 5.75% in view of its assessment that inflation would remain below the target set for the FY16 and 5) the current subsidy on DAP to the tune of Rs20 billion (Rs500/bag) shared on a 50‐50 basis by the federal and provincial governments is likely to continue in the next fiscal year with Ministry of Food proposing to remove the GST on DAP and other fertilizers.

Anticipations about next fiscal year’s budget, due to be presented next week, continue to build up and will keep the index range bound. Analysts expect the budget to remain neutral for most sectors, with chances for some negativity in foods and other import‐based sectors, amidst proposals for customs duty hikes. Additionally, increased spending on infrastructure, farmer subsidies (proposal to remove GIDC, continuation of DAP subsidy) and provincial schemes would keep cements, fertilizers and steel sectors in lime light. However, with Ramadan around the corner, the theme of lackluster volumes and listless trading is expected to prevail.

I posted a blog ‘too little too late’ after SBP announced 25 basis points reduction in interest rate. However, Pakistan leading brokerage house AKD Securities has a different stance. In its report it has said that contrary to market's consensus of interest rates having bottomed out, the SBP in its latest announcement cut the policy rate by 25bps to 5.75% (DR: 6.25%). The surprise move came with little justifications where the statement highlighted: 1) higher inflation projections for FY17 on expectations of global commodity price recovery and higher domestic tariff and tax incidence, 2) limited credit uptick (8.4%YoY as of Mar'16) despite prior 400bps rate cut, 3) BoP risks in the form of higher trade deficit, decelerating remittance growth and weak capital inflows ‐ all key macro trends warranting a prudent stance. With tighter fiscal targets, the 25bps reduction is unlikely to serve as a growth catalyst, where analysts view GoP to emerge as the key beneficiary with nearly Rs1.6 trillion PIB maturities due July'16. With macro risks in place, a quick reversal in the monetary policy remains a possibility, though key determining factors from here onwards are likely to SBP's target for real interest rates and PIB roll‐over.

With Budget FY17 less than two weeks away, market expectations regarding are running high. Targeting GDP growth rate of 6.2% (4.71% in FY16), news flow is shaping budget FY17 to be unpopular in nature, where additional taxes will be imposed, to boost up FBR related up revenues, are already under consideration. In this regard, super tax extension, withdrawal of remaining SROs, increase in Withholding tax on banking transactions to 0.6% for non‐filers, are some of the important ones. While continuation of Super Tax undermines profitability growth of the  bluechip companies, positives for Fertilizer is removal of GST/GIDC on urea, subsidy extension on DAP to aid offtake growth) and Autos (lowering of import duties in order to incentivize incumbents) whereas negativity could come in Foods Producers (imposition of 10% sales tax on milk). That said, market level developments (such as increased taxation on dividend income, removal of tax exemption on pension funds) are not very encouraging either. While initial market reaction could depict volatility, investors' sentiment and attention are most likely to soon turn towards the MSCI reclassification (EM status) announcement on 14th June.

Pakistan reduces interest rate by 25 basis points

On 21st May 2016 State Bank of Pakistan (SBP) issued Monetary Policy Statement for next two months. It has attracted mixed reaction, some term it too little and too late, while many term it a surprising move. However, a few term it an anticipated move and the evidence was rejection of all the bids received in the recent auction of Pakistan Investment Bonds (PIBs).

Many of the financial sector experts were under the impression that in May the SBP would increase the policy rate. This mindset was evident in PIB auction and SBP stance demonstrated though rejection of all the bids. However, one completely fails to understand the logic behind 25 basis point reduction. If the PML-N government is serious in boosting GDP growth rate, it has to reduce the policy rate minimum by 100 basis points.     

It is pertinent to note that SBP last cut the rates by 50bps in September 2015 and since then it has been maintaining status quo in subsequent announcement. SBP forecasts headline inflation (CPI) to remain within targets for the CY16 and going into CY17 to gain upward momentum. However, missed GDP growth target of 5.5% remained major concern and rate cut is expected to help spur growth.

Even though the inflation has been on the rise for past 7 months, SBP expected the outlook to remain low for CY16. However, with rising oil and commodities prices and expected imposition of certain tax measures by the Government in upcoming budget the SBP forecast the inflation to gain upward momentum in CY17. 

Large Scale manufacturing (LSM), mainly supported by construction and consumer durables, automobiles, fertilizers, and cement production, grew 4.7% in the July-March CY16 compared to 2.8% a year ago. The growth is expected to gain further on the back of improved electricity and security situation, according to SBP.

SBP also noted stability in balance of payments and upward trajectory in foreign exchange reserves on account of healthy workers’ remittances and lower international oil prices to keep the situation within manageable levels. Furthermore, SBP remained optimistic on external front, likely on account of continued workers’ remittances and bilateral inflows owing to various projects under CPEC.

Equity markets in general would perceive 25bps cut optimistic as it inflates the valuation especially for highly leveraged companies and sectors. Analysts maintain their likeness for cement, fertilizer, textile and other manufacturing base sectors which would remain in limelight going forward. Margins for banking sector are likely to shrink further thus putting banks under pressure. However, their profitability is likely to remain intact due to revaluation gains in PIB's portfolio.

Some market analysts see room for further reduction of rates, to spur growth. However, many expect SBP to keep rates on hold in near future, owing to rising inflation. A marginal upward move in inflation figures in upcoming months would be in line with SBP estimates. However if those numbers inflate somehow, SBP will have to revisit its rates policy sooner than later.

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.