Pakistan Market: Daily trading volume up 35 percent

The benchmark of Pakistan Stock Exchange PSX-100 resumed its pre-Brexit bullish momentum after Eid holidays, touching an all-time high to close at 39,188 level, up 3.7%WoW. As concerns eased slightly, the market was further supported by additional stimulus announced by Japan and stronger data from the U.S. coupled with recovery in crude oil prices, all favorable for the local bourse. Overall activity at the market improved drastically, average daily traded volume for the week increased by 35.5%WoW to 193.8 million shares.

 Key news flows during the week included: 1) Privatization Commission approved offloading of the government remaining 40.25% stake in KAPCO and Expressions of Interest from prospective bidders was invited, 2) three foreign investors including Shanghai Stock Exchange (SSE) have expressed interest in acquiring a stake of up to 40% in the Pakistan Stock Exchange, 3) total deposits of the banking industry crossed Rs10 trillion as of Jun'16 , up 10%YoY as compared to Rs9.14 trillion at the end of last financial year, 4) GoP announced a plan to lay an oil pipeline from Gwadar to China for the export of crude and task given to state construction firm Frontier Works Organization, and 5) GoP raised over Rs236 billion through auction of PIBs with cut-off yields for 3, 5 and 10-year papers declining noticeably.

Performance leaders during the week were: HASCOL, INDU, PIOC and SNGP; while laggards included: EFOODS, ABL, KAPCO and FATIMA. Volume leaders during the week: KEL, SNGP, DCL, EFERT and TRG. Foreign participation improved significantly where net inflow during the week amounted to US$21.4 million as against net outflow of US$1.2 million in last five sessions.

The market is still likely to come under pressure due to the global developments but analysts believe it could sustain current levels over the short term. Support should come from results season commencing next week where major sectors are expected to post strong earnings performance. However, risks for a pullback will linger in the form of: 1) political developments gaining prominence, 2) oil price swings likely to impact the local market, 2) another rate cut in the upcoming monetary policy proving negative for banking scrips. On the global front, upcoming US FOMC meeting and development on UK‐EU negotiations need to be tracked with implications for growing participation.

The IMF recently released its staff level report for the second last review under the IMF EFF stressing the country to continue structural reforms beyond the program's conclusion. Commending Pakistan on its strong performance on the program so far, the report also reiterates largely positive macro outlook though risks remain in the form of weak trade dynamics, policy slippages and political noise. With only one review left, IMF has added two structural benchmarks related to energy sector namely: 1) KAPCO's sell‐off and 2) updating plan for the resolution of circular debt. The twelfth review entailing disbursement of US$100 million is scheduled for end‐Sep'16 where successful achievement of targets would mark the conclusion of the facility ‐ the first for Pakistan. In line with our expectations, GoP will not be entering a new IMF agreement owing to stable external metrics however, GoP is expected to remain engaged in a consultative process with the IMF though without imposition of targets.

Pakistan stock market coming out of Brexit syndrome

As the fears of Brexit started easing benchmark of Pakistan Stock Exchange, PSX‐100 Index managed to close at 37,784 for the week ended on Thursday. Friday was a holiday on account of last Friday of Holy month of Ramadan.

Foreign selling also continued, though with much lesser magnitude reported at US$3.61 million during the week as compared to US$20.56 million a week ago. Ramadan factor eclipsed MSCI EM upgrade as the benchmark index barely crossed pre‐MSCI level of 37,518.

Average daily traded volumes fell by 8%WoW to 143 million shares as compared 155 million share due to trading curtailed to four day. Leaders during the week under review included FATIMA, HCAR, DAWH, AICL and ABL, while laggards included MTL, NML, AGTL, FFC and FFBL.

Key developments during the week included: 1) Ogra recommending an upward revision in per liter prices of HSD by Rs3.75 to Rs79.27 and motor gasoline petrol by Rs1.93 to Rs66.20, despite crude oil prices easing in the international markets, 2) ADB approving a US$600 million loan to help Pakistan roll out major structural reforms to improve the performance and financial sustainability of its PSEs, 3) the book‐building process for the IPO of TPL Properties has raised Rs696.8 million at the strike price of Rs12.50/share, 4) LSM posting a growth of 3.92%YoY in the 10MFY16 reflecting a partial revival in the industrial output, and 5) KEL submitting a Multi‐Year Tariff petition with Nepra seeking an increase in tariff by Rs0.66/unit in the name of O&M component for ten years commencing from July 1, 2016 to June 30, 2026 and has also sought a change in claw‐back formula threshold.

Though Brexit fears eased in the outgoing week, volatility is expected to remain relatively higher due to unfolding developments in the process. Nonetheless, re‐rating associated with the MSCI EM upgrade will likely provide impetus to the Index. Additionally, the end of Ramadan will mark return of volumes out of dormancy to normal levels. Keeping in view marker dynamics analysts recommend taking new positions in main blue chips that will likely make way into MSCI EM list that OGDC, HBL, MCB, UBL, LUCK, ENGRO, FFC, HUBC and PSO.

Latest banking sector data released by State Bank of Pakistan for May'16 indicates that banks' balance sheet continued to grow at strong levels, up 19%YoY, to Rs12.1 trillion. While private sector credit growth has not been substantial on account of bank's continued preference for risk‐free government securities (banks' lending to government grew by more than 29%YoY in May'16, posting growth of 8.2%YoY in May'16 alone. However, consumer financing grew by 9.3%YoY to 7.7% of the private sector loans as banks look to re‐focus on high margin auto finance and personal loans in the current lower inflationary environment. Spreads are likely to bottom out on possible monetary tightening in CY17. Analysts retain our liking for banks that offer: 1) superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability and reach to capture CPEC related investments.

Corporations that Control World

On June 13, 2016 "Information Clearing House" has posted a list of surprisingly small number of corporations that control massive global market shares. How many of the brands below do you use? Please take some time to go though the list by clicking this link http://www.informationclearinghouse.info/article44864.htm

Allow me to say that these corporations control assets bigger than many countries have and therefore these entities enjoy the power to install and topple governments in many countries.

Is Pakistan inching towards isolation?

On June 19, 2016, I posted a blog titled "Need to revisit Pakistan's foreign policy". My concluding remarks were, “It is feared that tweaked foreign policy is pushing Pakistan towards isolation. It may be true that Pakistan enjoys geopolitically important position but it has not been able to take advantage of its location. 

Pakistan needs a vibrant foreign policy and a young and more articulated full-time Foreign Minister. The current advisors are part of past legacies and also see the world with tinted glasses”.

Many of my critics termed this a sweeping statement as they still insist that getting the funds from IMF and other multilateral donors is an evidence of the commitment of these institutions towards Pakistan. This support would not have been there had the lenders didn’t have confidence in the ruling junta and economic potential of the country.

My immediate and most candid reply is, “These institutions are there to bail out countries which even face more precarious economic outlook as lending is their business. These institutions never allow any country to commit default. They lend only that much which is enough for the survival of the borrowing countries but the policies are never aimed at making these countries financially strong.

Since the readers are not ready to spend more than a few minutes, I have the following brief assertions to make in support of my apprehension that Pakistan is inching towards isolation. I also believe that many readers may not agree with my inferences but I am sure it can start a healthy debate and let those at the helm of affairs to revisit the policy and come up with a more articulated one.

1-     Since independence Pakistan’s foreign policy has remained under the foreign policy of the United States. As a result Pakistan never enjoyed cordial relations with the then USSR and Russia of today.

2-     Over the last four decades Pakistan has been fighting a ‘Proxy War’ in Afghanistan. This can be divided into two phases. In the first phase Pakistan along with Taliban fought a war with USSR that was termed Jihad. In the second phase, starting in 2001, Pakistan has been fighting a war with Taliban, a friend turned foe.

3-     Pakistan has earned hate from various Afghans groups, Taliban as well as Northern Alliance. This paved way for India to enter Afghanistan as a facilitator. The recent alliance of Afghanistan with Iran and India is not liked by the hawks present in Pakistan.

4-     Since independence in 1947 Kashmir has remained the biggest thorn in normalizing relationship between Pakistan and India. They have fought three wars and both the countries have attained the status of atomic powers. Every year both the countries spent billions of dollars on the purchase of lethal armaments, only to attain supremacy on each other.

5-     After the Islamic revolution in Iran Pakistan’s relationship with the country went into the shadow of foreign policies of United States and Saudi Arabia. Despite the lifting of sanction imposed on Iran, Pakistan has not been able to trade with Iran. It has not even succeeded in establishing banking links, a prerequisite for normalizing international trade between the two countries.

6-     China is often termed time test friend of Pakistan and has been supporting the country in overcoming its economic problems, the latest being CPEC. However, many groups having vested interest are trying to sabotage the project.

These are just a few bullet points that need an open debate in the National Assembly and Senate of Pakistan. Ironically, the absence of independent ‘Think Tanks’ in the country is a serious problem. It is believed that over 3,000 Think Tanks are operating in the United States, but not even one is operating in Pakistan.

WAPDA issues Rs100 billion Sukuk for Neelum-Jhelum Hydropower Project

Water & Power Development Authority (WAPDA) has signed an agreement with a consortium of 16 commercial banks for the flotation of Rs100 billion Sukuk for Neelum-Jhelum Hydropower Project. This has been termed the country’s biggest ever funds mobilization for a public sector entity through Shariah compliant instrument.

The signing ceremony for the financing agreement was attended by Syed Iqbal Ashraf, President national bank of Pakistan (NBP), Zafar Mahmood, Chairman WAPDA, Muhammad Zubair, CEO Neelum-Jhelum Hydropower Company (NJHPC) and representatives of 16 commercial banks were also present on the occasion.

Addressing the ceremony, WAPDA chairman said, “This is the biggest ever funds mobilization for a public sector entity in the history of Pakistan. Achieving this milestone reflects not only investors’ confidence in Pakistan and WAPDA, but also indicates the potential of investment that hydropower sector offers”. This issuance will go a long way in arranging funds for other hydropower projects as well to be initiated in the near future, he added.

NBP is not only the lead arranger but also has the largest share (around Rs35 billion). According to Mufti Ahsan Waqar, Head of NBP Shariah Board, the financial close has been achieved and the Sukuk would be ready to trade at Pakistan Stock Exchange after completion of other formalities.

Other banks in the consortium are HBL, Allied Bank, United Bank, Bank Alfalah, Meezan Bank, Faysal Bank, Bank of Punjab, BankIslami Pakistan, Askari Bank, Bank Al Habib, Bank of Khyber, Dubai Islamic Bank, Pak-Brunei Investment Company and Pak-China Investment Company.

The Sukuk has a tenor of 10 years and it is backed by the sovereign guarantee by the Government of Pakistan (GoP). The Sukuk enjoys a preliminary rating of ‘AAA’ from JCR-VIS and it is expected to have a wider impact on the financial market of Pakistan, helping augment a funding format that has been predominantly constrained to smaller deals with shorter tenors. The Sukuk is expected to provide avenues for Islamic banks and mutual funds to invest their liquid funds in a tradable GoP guaranteed Islamic instrument.

NJHPC has an installed capacity of 969 megawatts and the project is located in Muzaffarabad (Azad Jammu and Kashmir). The project envisages diverting Neelum River water through tunnels which fall into Jhelum River after producing power. On completion, the project will be capable of producing 5.15 billion units of electricity each year.

This mega hydropower project has been undertaken long after completion of Mangla and Tarbela dam projects. This ‘green energy’ project will fetch up to Rs50 billion annually for WAPDA as per existing tariff. The first turbine will commence generation by the end June 2017.

According to the details made available, 90 per cent construction work is under high mountainous overburden and only 10pc above the surface. The construction work on the project is progressing at a fast pace and overall progress of the project is around 82 percent so far.

Brexit keeps Pakistan market under pressure

To begin with, it may be true that the local equity market remained under pressure due to Brexit, which was an overreaction. The decision by the public is yet to be approved by the British parliament. It will be a long drawn process but meantime the business will continue ‘as usual’.

The panic trickling down to Pakistan Stock Exchange plunged the benchmark PSX-100 index to 37,390 levels, down 3.58%WoW, after losing 1,412 points intraday. Regional markets also witnessed similar trend while crude oil tumbled, along with other commodities on a stronger dollar.

Barring Friday, lack of triggers kept market activity dull during the week where average daily volumes declined by more than 15%WoW to 155.7 million shares. Foreign participation remained under pressure, with foreigners selling equities worth US$20.6 million during the week against a net buy of US$19.58 million last week.

Key news flow impacting the market included: 1) National Assembly finalizing amendment in 2016 Finance Bill, 2) Current Account deficit for May’16 rising US$792 million as against a surplus of US$23 million a month ago, 3) the World Bank approving US$1.02 billion in developmental loans for Pakistan under the CGDPF and Sindh Resilience Project, while ADB approved US$100 million loan for the construction of Shorkot‐Khanewal section of the M4 motorway, 4) yields slipping by 3‐ 5bps in the latest Market Treasury Bills auction with the GoP raising Rs138 billion and 5) news source indicating rise in petroleum prices in the range of Rs1.75‐Rs4.5/ltr for July’16. Leaders at the bourse were: MTL, FATIMA, HMB, FCCL and AGTL; while laggards included: BAFL, MCB, AICL, NML and NCL. Volumes leaders were: KEL, DCL, PAEL and DFML.

Bouts of volatility are likely to be witnessed in the week ahead as investors react to uncertainty in the global outlook following ‘Brexit’. Negative implication for the bourse can also emanate from any extended downside in commodities, particularly crude oil. With volatility in major currencies, Autos on (JPY) and Textiles (on EUR and GBP) could see further downside.

After recording surplus for three consecutive months, current account balance returned to the red zone in May'16 recording a deficit of US$792 million expanding, consequently, 11MFY16 current account deficit to US$2.48 billion, up 1.2%YoY higher than the balance in 11MFY15, primarily reflecting a worsening trade deficit. The trade data depicts 22.6%YoY widening in the trade deficit in May'16 as rising imports (up 7.6%YoY) added to the burden of declining exports (down 6%YoY). With similar trends to continue analysts expect current account deficit to further deteriorate. Resulting pressures on current account and hefty debt repayment in FY17 can likely have spillover effects on the Pak rupee exchange parity. However, rising foreign exchange reserves and improving foreign investment outlook should keep erosion in rupee value limited.