Selling by foreigners keeps Pakistan stock market under pressure

The benchmark of Pakistan Stock Exchange breached 40,000 mark during the week ended August 19, 2016. This prompted the investors to indulge in profit taking in the later part of the week to pull the index below 40,000 level. Foreign selling added to the pressure with outflows for the week at US$18.38 million considerably higher than US$1.03 million earlier. Daily average volume for the week also declined 12.9%WoW to average 230.69 million shares.

Key news flows during the week included: 1) MTB yields remain unchanged across all tenors in the week’s auction despite heavy participation with bids amounting to above Rs659 billion where the GoP raised Rs373 billion, 2) FDI declined 14.6%YoY with net flows of US$64.3 million in July’16 with total foreign investment for the month at US$113.9 million on rising portfolio investments, 3) the NA Standing Committee on Finance approved the Benami Transaction (Prohibition) Bill, 4) ECC approved sale of imported urea available with NFML at a discounted price of Rs1310/bag compared to the subsidized local price of Rs1,400/bag, 5) GoP got ready to float fresh tenders for the import of 200 mmcfd of LNG to cope with the expected surge in demand during winter this year and 6) Privatization Commission sought comfort letter on PPA and generation license of KAPCO from the Ministry of Water & Power to offer GoP’s residual shares to investors during domestic road shows.

Interest in the coming week is likely to be centered on remainder corporate results for the quarter. Major companies scheduled to announce results include HUBC, KAPCO, OGDC, CHCC, BAFL, NBP and INDU. However lacking major triggers, the broader market is expected to remain listless. Global crude prices are likely to be tracked keenly ahead of OPEC’s meeting next month.

Renewing concerns on potential slowdown in remittance flows on worsening global financial dynamics, inflows during July'16 marked a sharp decline of 20%YoY/36%MoM to US$1.33 billion ‐ the lowest monthly flow since April'14. This reflected unfavorable developments that included: 1) slowdown in GCC economies on oil price slump and 2) US regulatory tightening on money transfer. While room remains for volatility in the Rupee on sluggish remittances, analysts maintain their FY17 forecast of 3% PkR/US$ depreciation on Pakistan’s foreign exchange reserve strength. In terms of its implication on the banking sector, some revenue dilution can be expected in UBL, HBL and NBP with remittances contributing more than 10% to total fee income approximately. However, expansion in branchless banking segment is likely to provide a buffer to any downside arising from slower remittances growth having no material impact on banks' earnings.

Exhibiting the brunt of monsoon season, latest APCMA's dispatches data depicts domestic demand growth of 3.9%YoY in July'16, far lower than 9.2%YoY growth in June'16. While flatter exports during July’16 as compared to the previous month indicated that freefall has likely ceased, settling at new normal levels post anti‐dumping duties imposed by major cement export markets (South Africa/Iraq). However, exports increased 20.2%MoM in July'16 as against a 15.7%MoM in July'15. While the slowdown in demand has much to do with the seasonal factors, analysts believe demand to start picking up from August'16 as construction activity is likely to pick pace post‐monsoon.

Has OPEC lost control on oil prices?

A hype is being created that both OPEC and non-OPEC oil producers will sit down once gain to work out the strategy to curtail supply. The need has been felt because faltering global economy fails in boosting consumption. It is widely anticipated that the meeting will not yield any result because of the Saudi stance.

The largest oil producing member of OPEC is not willing to cut its own production but trying to shift the blame to Iran for the prevailing glut. Saudi Arab has repeatedly expressed its unwillingness to curb production unless Iran responds in the similar manner.

Over the months it has become evident that Iran will not commit for any reduction in its production unless the country regains its lost market share, due to the imposition of economic sanctions. Therefore, Saudi Arabia must cut its production and set precedence for other countries.

One can easily understand unwillingness of Saudi Arabia to cut production because of its funding of proxy war in Yemen, Syria and various other countries. Though, Saudis will never accept this acquisition but just can’t deny the harsh reality that tolerating a prospering Iran is unbearable for it.

One has all the reasons to believe that Saudi Arabia needs more petrodollars for buying arms for the rebel groups. It has been feeding Syrian rebel groups for years, which has also forced Iran to support the oppressed groups in Yemen, Bahrain and Syria.

Therefore, one should abstain from believing that OPEC will agree on curtailing oil production. The situation can improve only if consumption improves. May be it is hoping against hope but that is the only silver lining.

Pakistan Stock Exchange fails to sustain 40,000 level

During the week ended August 12, 2016, the benchmark of Pakistan Stock Exchange PSX‐100 Index grew by 1.3%WoW. It briefly rose above 40,000 mark but failed to sustain the trend and finally closed slightly lower at 39,908. Top tier banks like UBL and HBL and E&Ps particularly PPL, OGDC, POL helped the Index attain new high.
Key news flows during the week were: 1) overseas Pakistanis remitted US$1.33 billion during July'16 as compared to US$1.66 billion received in July15, posting a decline of 20%YoY, 2) Government borrowing from the central bank shot up almost to Rs786 billion in July'16 against Rs113 billion during the corresponding month of last year, 3) PSO, the country's biggest oil marketing firm, imported 42 cargos carrying 133,307,087 mmbtu of LNG since March'15 to meet growing energy requirements and, 4) cement sales to domestic markets showed a healthy increase of 12.4%YoY during July'16, whereas exports remained almost flat. Top performers for the week were: APL, HCAR, POL and PPL. On the flipside PTC, MCB, AGTL and NCL were the laggards. Volume leaders on the basis of average daily traded shares for the week were KEL, DSFL, DCL and NIB.

Attock group companies are likely to kick off the coming week's earnings announcements. The key energy companies to follow are APL, POL and index heavyweights HBL and ENGRO. Devoid of major developments on the political front, continuation of earnings season may lead to consolidation in the market with side stocks gaining steam. Additionally, anticipations regarding OPEC's meeting announced for next month may keep Oil & Gas scrips in focus.

In line with expectations, MCB Bank has posted consolidated profit after tax (PAT) of Rs11.1 billion (EPS: Rs9.84) for 1HCY16 as compared to PAT of Rs13.0 billion (EPS: Rs11.7) for 1HCY15, down 15%YoY. Alongside the result, MCB also announced a second interim dividend of Rs4.0/share. The 21%QoQ drop in earnings was on the back of higher tax incidence on tcontinuation of super tax (tax rate of 52% in 2QCY16 as compared to 34% in 1QCY16). Key 1HCY16 result highlights included: 1) a 4%YoY decline in NII, 2) reversals of Rs564 million in 1HCY16 as against Rs756 million same period last year, 3) a 34%YoY decline in non-interest income amid lower capital gains, utilizing Rs682 million in the half under review against Rs2.9 billion in same period last year, 4) manageable 3%YoY increase in expenses.

ABL has posted slightly above expectations consolidated PAT of Rs8.8 billion (EPS: Rs7.58) for 1HCY16 as compared to PAT of Rs7.5 billion (EPS: Rs6.55) for 1HCY15, up by 16%YoY. The deviation in projection and actual can be attributed to higher utilization of capital gains of Rs2.5 billion. Also provisions were lower at Rs243 million against the forecast. Sequentially, a 20%QoQ decline in earnings was on the back of higher tax incidence (tax rate of 47.7% in 2QCY16 as compared to 35.0% in 1QCY16). Alongside the result, ABL also announced a second interim dividend of Rs1.75/share. Key 1HCY16 result highlights were: 1) a 2%YoY/8%QoQ uptick in NII, 2) provisioning of Rs243 million for 1HCY16 as compared to Rs550 million during the same period last year with reversals worth Rs33.3 million booked during the second quarter, 3) a 21%YoY jump in non-interest income amid higher capital gains and fee income and 4) a 9%YoY increase in total expenses.  While ABL’s 1HCY16 earnings performance remains heavily influenced by capital gains, growth in net interest income is encouraging. Non-interest income has grown too however still remains under 30% of total income, a concern particularly when peer banks have grown in this regard.

The AKD Cement Universe has remained in limelight on account of robust domestic demand. Going forward, the brokerage house expects this trend to continue to drive growth backed by the government's strong focus on infrastructure development and rising private sector development. However, short-term risks to domestic demand have sprung in the form of incidence of new property tax on SBP's new valuation methodology. While the real estate market might suffer in the short‐run brokerage house believes it to have no viable impact on earnings growth so far. Moreover, irrational buildup of expansions in South Region may create significant pricing pressure as the domestic demand growth may not accommodate such a huge increase. This potentially points towards the rivalry between LUCK and DGKC for the market share. While risk of pricing indiscipline has increased, rapid increase in coal prices (+31% CYTD) will likely crimp up the margins further. Though, rising costs are unlikely to be passed on to consumers as the cement prices are at historic high levels, upcoming energy diversification projects are likely to provide some relief.

Pakistan seeking partnership with international warehousing and collateral management companies

State Bank of Pakistan (SBP) and all the financial institutions that extend loans to the agri sector deserve appreciation for meeting the indicative target of Rs600 billion set for FY16.

The amount disbursed FY16 is 16 percent higher as compared to FY15. The SBP deserves real appreciation because during this period farmers were not keen in boosting the output due to the lower commodity prices.

I am a staunch believer that if the Government of Pakistan (GoP) is serious in boosting GDP growth rate as well as achieving food security it has to remove the impediments affecting agri out. Analysts have the consensus that agri output can be doubled without bringing additional area under cultivation.

It is no secret that the biggest hurdle in achieving food security is colossal post-harvest losses ranging from 15 to 40 percent for different crops. Two factors responsible for these losses are: 1) absence of modern warehouses and 2) inefficient logistic system. Extension of loans to farmers may have helped in increasing production but certainly not helped in containing the post-harvest losses.

Nearly three years ago, the SBP had circulated the draft rules for Warehouse Receipt Financing. The second set of draft regulations has been issued by Securities & Exchange Commission of Pakistan (SECP) in June this year. While one may question the logic behind issue of regulations by both the apex regulators, the real point of concern is that the focus of both the regulators is not the two staple food grains i.e. wheat and rice.

It is highly deplorable that the total output of wheat, rice and maize touches 40 million tons annually but all sorts of warehouses put together can’t store even one-tenth of this quantity. Ironically, both the apex regulators are working hard on warehouse receipt financing, which can’t be achieved without construction of modern warehouses and creation of collateral management and certification companies.

Even more surprising is that SBP offers financing of up to 65 percent of civil works, but investors are not keen in availing this facility. It may be said that the entrepreneurs either fail to understand the whole concept or are scared to initiate such a venture, where dealing with feudal lords is considered highly risky.   

Has Pakistan-India animosity yielded any good?

During August both Pakistan and India will celebrate their  independence from the British Raj in 1947. Over the years both the countries have fought various wars, accumulated piles of conventional arms and also attained the status of ‘Atomic Powers’. They may boost of spending billions of dollars every year on buying arms but bulk of the population of both the countries live below the poverty line. My question to the rulers and citizens of both the countries is; has animosity between Pakistan and India yielded any good?

My own reply is a big no and I am sure that people from both the countries also share the same feelings, except the hawks present on either side of the border. These hawks are the product of British Raj that ruled this part of the world by following ‘divide and rule’ policy. While leaving the subcontinent it left a thorn, Kashmir. Those who don’t believe in my point of view must read the misdeeds of Toney Blair, British Prime Minister that led to attack on Iraq, a country still inferno after nearly 15 years.

While the citizens of Pakistan, India and Bangladesh may have some doubts about the economic potential of their homelands, British Raj knew the real worth when it made Indian subcontinent its colony. Even at that time the area was known as ‘Golden Sparrow’. In modern day term the area has robust agriculture and industry, treasures of minerals hard working people and above all a market comprising of billions of people.

Kindly allow me to say that had India and Pakistan not been spending billions of dollars on purchase of arms and instead using it for the development of infrastructure, educating their children and health care, these countries would have been ‘economic super powers’ and ahead of Malaysia, Singapore, Korea, Japan and even China. Spending least on education, healthcare and providing ‘safe drinking water’ have pushed these countries deeper in economic disorder, social malice and extremism.

If one looks at the most stable and fast growing economies, Germany emerges as the most outstanding one. When the Germans decided to unify East and West Germany, many critics termed it ‘dooms day’ for West Germany. However, it will be very hard to find the rudiments of East Germany now. I also say that one of the reasons Britain opted to quit European Union is also the legacy of British Raj. People of United Kingdom still don’t understand that they are no longer the super power. However, to prove their superiority they keep on interfering in the affairs of the countries commonly known as ‘Members of Common Wealth’.

Lately, anti-government demonstrations in Indian-Kashmir have attained a new hype. Hawks from both sides of the border claim that Kashmir belongs to them. The super powers and even the UN have failed in asking what the people of Kashmir want’. If one could recalled the issue of Sudan was resolved quickly and prior to that Cyprus trauma overcome, only because the super powers had the consensus.

One may ask why the super powers are not serious in resolving Kashmir issue. My own understanding is that super powers love to create disputes, develop rebel groups, provide them funds and arms to keep their armament factories running at full capacity.

Having watched the recent wars in Afghanistan, Iraq, Yemen and Syria and earlier wars in Vietnam and Korea, I will not hesitate even for a second to call these ‘Proxy Wars’. The irony is that rulers become a puppet of super powers and ultimately meet the fate of Saddam Husain, Anwar Sadat, Ziaul Haq, Indra Gandhi, Mujeeb-ur-Rehman and the list can continue.  

While the proxy wars bring nothing except destruction to the countries where these are being fought, super powers continue to grow stronger and have ample funds to promote proxy war. However, they usually hide their ugly faces behind the multilateral lenders and NGOs and talking about refugees issue. It is never too late to mend. People of the third world must realize that super powers thrive on proxy wars and they get nothing but destruction and killing of innocent people.

Pakistan market witnesses 23 percent increase in daily traded volume

The week ended August 05, 2016 was a volatile week as the benchmark PSX‐100 Index declined marginally to 39,390 levels. The decline was initially led by the banking sector in the backdrop of status quo in the monetary policy followed by selling pressures particularly in Cements on anticipated weaker dispatches attributable to Ramadan/Monsoon season slowdown effect. The point worth mentioning is that average daily traded volume increased by 23%WoW to 225 million shares. Leaders during the outgoing week were: PSMC, BAFL, KEL, SHEL and ICI, while laggards included: LUCK, PIOC, MLCF, KAPCO and MEBL.

Key developments during the week included: 1) Market Treasury Billions cut‐off yield posted a modest gain despite SBP maintaining interest rate unchanged, 2) Finance Minister and SBP governor alluded that there is no further IMF program under consideration, 3) PSMC announced increase in prices of its vehicle variants by 3% per unit in an attempt to maintain its profit margin, 4) Headline inflation rose by 4.12%YoY during the first month on the current financial and 5) SBP kept policy rate unchanged in its latest monetary policy statement.

Although, PSX‐100 Index is hovering near its highest levels, it is expected to remain volatile due to: 1) increase in political heat as opposition parties plan countrywide protests against the government, 2) weaker anticipated earnings in current result season owing to super tax and 3) volatile oil prices in spite of oversupply/surplus inventories. Financial result announcements of index heavyweights i.e. MCB, ABL and EFERT in upcoming week will likely to plunge Index downward on account of expected decline in earnings as a result of the imposition of super tax and impact of negative sector‐specific factors.

Recovering from initial Brexit shocks with major global economies vowing to unveil stimulus measures to boost economic growth, international equities rebounded sharply during the previous month with MSCI EM Index returning 4.9%MoM. In tandem, PSX‐100 Index closed the month 4.6%MoM higher at 39,529 points, just falling short of the 40,000 level. Volumes also depicted a healthy trend growing 9.8%MoM to average at 189.3 million shares during the month. MSCI led foreign interest was evident in July with foreigners buying equities worth US$26.8 million against a net selling of US$2.02 million a month ago (excluding foreign participation in EFERT divestment), building positions in Banks, Cements and OMCs. Amongst the main board, Automobiles and Parts, Cements and Commercial Banks garnered traction while Healthcare Services along with Multi‐utilities in the sideboard were key performers. Going forward, market's performance in Aug'16 is likely to be guided by the ongoing result season where we see strong earnings performance by Cements & Textiles. Banks are also expected to remain in the limelight with UBL's above expected 1QCY16 earnings setting the tone for the rest of the sector. That said, political pressures can come to the fore with opposition parties (PTI and PAT) likely to stage anti‐ government protests during the month.

In continuation of what has been a persistent trend now, Pakistan exports remained lackluster in June'16, declining to US$1.65bn. Similarly, FY16 exports were recorded at US$20.85 billion, marking a decline of 13%YoY from US$23.94 billion posted in the FY15. The fall came primarily on the back of a slowdown in textile and other commodity related sectors with textile and food group slipping by 8%YoY and 13%YoY respectively during the year. Going forward, despite anticipated weakness in Pak Rupee, analysts expect textile exports to remain under pressure primarily on: 1) slow Chinese demand, 2) adverse exchange rate limiting GSP plus benefits, 3) concerns of an economic slowdown in EU following Brexit and 4) low cotton production, down by 34%YoY.

Pakistan Stock Market Receives Higher Foreign Investment

During the week ended 29^th July 2016, the benchmark of Pakistan Stock Exchange PSX-100 closed at 39,529 levels – marking another record high level as results season commenced this week. Average daily trading volumes tapered slightly during the week to 182 million shares as compared to slightly more than 207 million a week ago. Foreign participation improved with an inflow of US$10.94 million as compared to an outflow of US$11.5 million a week ago. Leaders at the bourse were SHEL, NCL, LUCK, NML and ABL; while laggards included POL, PSMC, PPL, OGDC and EPCL. Volume leaders were DCL, AGL, SNGPL, DFML and TRG.
Key news flows for the week included: 1) SBP scheduled to announce its first monetary policy review on 30^th July, 2) the GoP and IMF commenced staff level discussions for the twelfth and last review under the EFF program, 3) Pakistan and Russia to start negotiations for laying 1,100km LNG pipeline with an estimated cost of US$2 billion next week where the first phase of the project is scheduled to complete by December next year, 4) ECC allowed BAFL to remit US$27.2 million to set up branch in UAE, 5) DRAP approved price increments for scheduled drugs, non‐scheduled drugs and lower priced drugs under the Drug Pricing Policy and 6) Mari Petroleum’s Managing Director stated that the company plans to establish a 400MW power plant at Dharki/Sadiqabad with an estimated cost of US$400 million.

The key event to track for next week will be the monetary policy announcement on the weekend. The expectations remain split between status quo and 25bps reduction in the policy rate. CPI inflation for July’16 to be released next week will also help to set expectations for further monetary policy action. Earnings season is likely to be the guiding factor over the near term with key results likely to be announced in the coming month. On the global front the further decline in international crude oil prices can keep the pressure on the Oil & Gas sector.

Reflecting a slowdown in revenues and tighter gross margin (GM), EFOODS is likely to post profit after tax of Rs793 million (EPS: Rs1.04) for 2QCY16 earnings, down 13%YoY/28%QoQ. This will effectively take 1HCY16F earnings to Rs1.90 billion (EPS: Rs2.48) as against Rs1.97 billion (EPS: Rs2.58) for 1HCY15. In this regard, intensifying competition in the dairy sector is likely to lower revenues by 6%YoY and remain flat sequentially. GM is also anticipated to take a hit (expected to go down by 140 bps YoY in 1HCY16F) on account of higher raw milk prices in lean season. Going forward,the pace of earnings growth is likely to come off for EFOODS (3-year earnings CAGR of 11%) where volume saturation in the industry along with recovery in dairy prices poses downside risks to earnings. Analysts believe price performance will more be a function of EFOODS' performance ipost acquisition by Royal Friesland Company.

The listed banking sector has shed 14.9% CYTD struggling on account of lower interest rate with reversal expectations now pushed forward beyond 1HCY17. Banking spreads continue to remain at their multi‐year lows, while advances growth has also failed to pick up any significant pace. In addition, the continuation of super tax is another impediment in earnings growth in an already challenging operating environment. These factors are likely to manifest in the upcoming 1HCY16F results where analysts expect earnings surprise can come from higher utilization of capital gains (as seen in 1QCY16) and lower than expected credit costs (particularly in case of National Bank of Pakistan). In the backdrop of lower earnings expectations, analysts continue to look favorably towards fundamentally resilient HBL and UBL, based on: 1) a superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability to capture CPEC related investments.