Pakistan Stock Exchange witnesses 14.5% surge in trading volume

During the week ended 7^th October 2016, the trading volume at Pakistan Stock Exchange surged by 14.5 %WoW. The surge came despite rising cross-border tensions and political noise. The benchmark Index closed at 41.200 level.

The factors keeping the market buoyed included the response from global debt market for Pakistan's international Sukuk, positive outlook on Pakistan's banks from Moodys Investor Services and consolidation in global oil benchmarks.

The key news driving the market included: 1) Pakistan issued US$ one billion Sukuk of 5-year tenor at 5.5 percent, 2) some 17 foreign and local strategic investors, including Chinese and US stock exchanges initiating due diligence process for buying 40% stake Pakistan Stock Exchange (PSX) by end November this year, 3) Central Development Working Party (CDWP) approved 23 projects worth Rs31.5 billion, 4) cement dispatches rose 8.3%YoY during first quarter of current financial year with capacity utilization during the quarter rising to 79% and 5) The federal cabinet approved draft Bill for Regulation for Benami transactions according to which any property held in "Benami" can be confiscated by the Government of Pakistan.

Gainers at the bourse were: LOTCHEM, SHEL, SNGP and DAWH. Laggards were: HCAR, PSMC and, PPL. Volume leaders were: BOP, PIAA, PACE and WTL.

Next week will be shortened due to Ahura holidays by two days, likely to keep trading activity muted. Results season coming in mid‐October is likely to offer some triggers may. There is also room for price performance in selected Banking scrips on potential positive surprises from capital gains.

The takeaways from September 2016 included: 1) Pakistan’s central bank leaving interest rate unchanged, 2) members of OPEC tending to agree on containing supply glut by curtailing output and 3) monetary policies of US Fed and BoJ guiding sentiments and performance consequently. That said, political concerns both at home and across the border escalated, restricting gains to a certain extent. Out of the mainboard sector posting major gains were, Autos, Telecommunications and Textiles, while Cements were down on emerging price war concerns amid the recent flurry of expansions by players and Fertilizers due to the reduction in urea prices amid slower offtake. Heavy participation continued in mid‐tier stocks resulting in increased trading volume. Foreigners continued to shy away from the market, selling equities worth US$41.3 million as against selling of US$20.4 million in August 2016.

The cement sector witnessed robust margin improvement backed by declining coal/FO prices to record low levels. Lately, coal price surged due to stringent rules for mines in China, EU's plans to reduce coal usage by 14% in next seven years and tighter supply. Coal price may hold its ground if oil price stability is achieved through OPEC's coordinated output control. In this backdrop, analysts fear a decline in earning. Fears of pricing indiscipline grew with the announcement of the addition of 12.1 million tpa capacities. However, robust domestic demand and normalized exports are expected to keep interest alive.

Has Saudi Arabia accepted its oil policy was faulty?

Saudi Arabia leading the oil cartel, Organization of the Petroleum Exporting Countries (OPEC) has surprised oil traders and analysts by announcing a production deal at the end of a recent but informal meeting in Algiers. This is after a long time that Saudi Arabia has consented to production cut. In 2014, against all odds Saudi Arabia had decided to enhance output for retaining its market share.

At Algiers, OPEC members committed themselves to an overall output level. The cartel issued a statement comprising of less than 700 words, out of these the two most important announcements were: 1) commitment by 14-member cartel to fix a maximum ceiling of 33 million barrels daily out (bpd) and 2) announcement to establish a committee to study the implementation of fixing new production levels for individual member countries and to consult with non-OPEC oil producing countries.

The critical question remains whether the production target will affect the actual number of barrels being marketed by the organization's members?

In response to the OPEC decision, oil prices settled mixed on Friday while posting their second straight monthly gain. While skepticism prevailed about the cartel's pledge, some analysts believed that the global oversupply at the maximum is around 1.5 million bpd. This can be managed easily if every member acts prudently. Saudi Arabia has the highest responsibility to set precedence by cutting its output up to 750,000 bdp and also to reap the highest benefits. Some analysts believe that Saudis probably calculated that an increase in prices to $50-60 per barrel would bring useful extra revenue to them without stimulating too much production from other sources due to some prevailing constraints.

If one looks at OPEC's latest production figure, it prompts even bigger cut. They are all Petro states suffering from low oil prices. It is prudent for them to cut production a little voluntarily and get a meaningful increase in their revenue. The mere announcement about production cut has raised oil price by more than 5 percent and actual cut could bring even higher gains.

Russia, one of the arch rival of Saudi Arabia in geopolitical arena, has been producing/pumping crude at record highs, said it would find a way to freeze production if a deal is reached with OPEC. The US ‑ present foe but a friend of yester years, also a non-OPEC member and now the biggest oil producer ‑ said on Thursday it had little faith in the OPEC plan. U.S. energy envoy Amos Hochstein told Reuters that any price gains from the cuts would trigger higher U.S. production, which would ultimately defeat the deal. This is a real treat as a weekly report about U.S. oil rig count showed local drillers have added 95 rigs for the third quarter, the most in any quarter since 2014.

Within OPEC and besides Saudi Arabia, supply has risen since 2014 as OPEC relinquished its historic role of fixing output to prop up prices as Saudi Arabia, Iraq and Iran wanted to pump more oil.  Supply from Iran, another arch rival of Saudi Arabia has posted the fastest increase in exports after the lifting of Western sanctions. Its production is inching towards the pre-sanctions levels.

The kingdom’s change of heart seems to have come from a realization that low oil prices were not rebalancing the market in the way that official hoped. Lower prices were expected to curb production by other producers with higher costs while improving the kingdom’s long-term position. Shale production in the US has been falling since early 2015 but it has been more than offset by increasing output from OPEC members.

The kingdom’s strategy assumed that it had sufficient financial resources to withstand a prolonged period of low prices while competitors would be forced to scale back. But the downturn in oil prices has lasted much longer than and shows no sign of ending. Falling oil revenues have pushed the kingdom’s economy close to or into recession and forcing deep cuts in government spending on infrastructure as well as social payments and salaries. Saudi Arabia’s foreign reserves have declined by $182 billion, a fall of nearly 25 percent, since August 2014

The decision certainly shows a strategic shift at the top of the Saudi administration, where Deputy Crown Prince Mohammed bin Salman has emerged as the key decision-maker. Prince Mohammed indicated earlier this year, it would not matter for the kingdom whether oil prices were $30 or $70 per barrel. But in recent months officials have realized that prices are unsustainably low and want them to rise.

Moral of the story is that Saudi policymakers are making another big assumption that rival producers have little capacity to raise output in the short term. They may be partly right because Iran is close to its pre-sanctions production capacity and will need significant investment to achieve substantial increases in output. Russia too probably has limited ability to increase production in the short term.

However, the key threat that remains is a potential increase in shale production in the meantime. U.S. shale companies have already added more than 100 drilling rigs since the end of May, despite the fact that the sector remains under intense financial pressure.

Hike in global oil price drives Pakistan stock market

Despite recent political flares up the benchmark of Pakistan Stock Exchange PSX‐100 index closed at 40,542 levels for the week ended 30^th September 2016. The rally was primarily driven by index heavy-weight energy companies due to upward move in international oil prices and decision of the central bank to leave interest rate unchanged. Average daily volume for the week came down to 528.3 million shares as compared to 727.8 million shares a week ago. The volume leaders were: BOP, PACE, WTL, KEL and TRG. Performance leaders during the week were: INDU, SHEL, PSMC and LOTCHEM; while laggards included: MEBL, NBP, KAPCO and HASCOL.

Key news flows during the week included: 1) ICL launches new caustic soda IEM plant‐2 (Phase‐II) having capacity of 25,000 tons with a total project cost of Rs750 million, 2) ICI revealed its plan to set up a facility in Pakistan to manufacture Morinaga infant formula products in partnership with Morinaga and Unibrands, 3) public announcement of offer to acquire 49.8 million ordinary shares of EFOODS by FrieslandCampina at Rs151.85/share, 4) Executive Board of the IMF on 28^th September completed the 12^th review of Pakistan's 3-year economic reform program enabling the disbursement of the final tranche of about US$102 million, 5) China‐led Asian Infrastructure Investment Bank (AIIB) approved US$300 million loan to fund the expansion of a hydropower project in Pakistan, and 6) GoP expressed plan to raise US$1.00 billion from the international debt market through issuance of Sukuk in October this year.

Selling by foreigners also eased out during the week under review with net outflows declining to US$8.6 million from considerably high net outflows of US$16.04 million a week earlier. With result season nearing its end, a few market triggers are expected in the near term. However, political risk remains in place with PTI’s protest to continue in the days to come and recent tension between Pakistan and India may keep investors cautious. Following the OPEC’s hint to cut production for the first time in eight years, sent crude prices higher by more than 6%, which is likely to keep interest intact in index heavy weight energy companies.

Oil producers’ cartel, OPEC has hinted towards capping/cutting production in its informal meeting in Algiers. While details are expected to be finalized in the group's formal meet in November this year, the mere indication to cap/cut output raised oil prices by 6%. With expectations now tilting towards higher oil prices, analysts try to work out possible implications of the decision on the market AKD Securities report indicates that its E&P universe is likely to benefit the most with 4.2% higher FY17 anticipated earnings for every US$5/bbl increase in oil prices. OMCs on the other hand can lose out on retail fuel demand moving towards cheaper alternatives. Additionally, in the backdrop of higher oil prices, macro stability remains at risk with concerns emerging on: Balance of payment and exchange rate, good for export-oriented Textiles and IPPs with dollar-denominated revenues and fear of sharp escalation in inflation and its subsequent impact on interest rates.

Despite a challenging operating environment (super tax imposition, spreads at decade low), fundamental improvements by National bank of Pakistan (NBP) in areas is encouraging. The most prominent in this regard are: 1) growth in net interest income (NII) up 9%YoY and 31%QoQ and visible improvement in asset quality due to provisions down by 78%yoy and 48%QoQ in 1HCY16. With regards to the former, the bank has effectively brought down its domestic cost of deposit to 3.8% from 5.3% in 1HCY15 by building on its CASA. While credit quality concerns have not abated completely, these have been continually improving with NPL ratio coming down to 17.8% in June'16 as compared to 18.4% in December'15. Consequently, profitability in 1HCY16 has remained strong registering growth of 28%YoY/51%QoQ.

Oil producers trying to create a storm in teacup

The much-talked about meeting of members of OPEC began in Algeria on Monday, 26^th September 2016. The western media is trying to create hype that the meeting may remain inconclusive due to ever prevalent rift between Saudi Arabia and Iran. They are partly right because of the recent hostilities on the occasion of Hajj. However, one can hardly deny that this hostility is not new but spread over centuries.

As I have posted in one of my blogs that western media often lies, the present hype is also a tactical move to malign two of Muslim oil producing countries. Over the months the western media dominated by Zionists have been busy in proving that the world is losing because of low oil price. The fact is that non-oil producing countries are benefiting due to the substantial reduction in energy cost.

Another lie of the western media is that due to low oil prices economies of most of the developed countries are in the shamble. The media is also propagating that since the rich countries are the biggest buyers of goods produced in developing and under-developed countries; poor performance of developed economies is also impacting economies of countries exporting their products to developed countries.

I tend to disagree with this rationalization because developing and under-developed countries are the major producers of commodities. With the decline in the price of oil, commodity prices have also plunged to historic low levels. Therefore, if these countries are benefiting from low oil prices, their exports are also fetching dismal prices.

I also fail to understand the logic of Saudi Arabia that it would cut production, only if Iran cuts production, which is imprudent approach. It is Saudi Arabia which has increased its output and market share of the global market after economic sanctions were made further stringent. Therefore, it is right to say that Saudi Arabia should allow Iran to gain its pre-sanctions output and also bring its production to pre-sanctions level. In other words, Saudi Arabia has thrived by snatching Iranian share.

Moral of the story is that people are hoping against hope, while market manipulators are still minting money by keeping oil prices volatile.

Pakistan market witnesses 18 percent increase in daily trading volume

At Pakistan Stock Exchange, volatility on concerns regarding domestic politics and jitters from global monetary policies failed in deterring investor, if  a few chose to take an exit others were more than willing to enter. This is evident from the fact that that the benchmark index posted a marginal decline of 1.44%WoW and the market closed the week ended on 23^rd September 2016 at 39,782, not too far from coveted 40,000 level.

Volumes remained robust with daily average for the week rising close to 728 million shares (up 18%WoW), though concentrated in sideboard scrips with leaders for the week included: WTL, PACE, BOP, DSFL and TRG. Foreign selling persisted with outflows for the week exceeding US$16 million as compared to US$4.5 million in the previous five sessions. Leaders at the bourse were: HCAR, MTL, ASTL, EPCL and FATIMA; laggards were LOTCHEM, DAWH, SNGP, AKBL and FFC.

Key news flows of the week included: 1) PIB auction yields remained largely stable with GoP raising Rs219 billion, 2) World Bank approved US$390 million loan for Tarbela fifth extension project, 3) current account deficit for 2MFY17 touched US$1.3 billion, an increase of 92%YoY, 4) news reports indicated that Shanghai Electric Power has qualified as final bidder for an estimated US$1.6 billion stake in KEL while the latter announced its intention to acquire 40.25% stake in KAPCO and 5) Ministry of Industries and Production decided to seek approval of the ECC for further reduction in urea prices in order to offload 1.5 million tons of stock. Pakistan’s central bank is scheduled to release its monetary policy statement later on Saturday; with wider expectations no change in interest rate. It is likely to remain a non‐event for the market. Political risks remain in place with PTI’s protest set for next week likely keeping investors cautious. On the global front, following no reduction in interest rate by the US Fed, the focus will now remain on oil producers’ meeting next week, which is also likely to fail in arriving at any consensus at containing output.

Rising sharply, Pakistan posted current account deficit for August'16 at US$721 million compared to US$595 million a month ago. Consequently, 2MFY17 deficit accumulated to US$1.32 billion rising 92%YoY due to 1) rising trade deficit as imports growth accelerated, 2) remittances were still 3%YoY lower in 2MFY17 despite recovery during the month under review and 3) absence of US$337 million CSF payments received in first two months of the current financial year. According to details, imports grew at 13.9%YoY on the back of higher machinery imports (up 85%YoY) while exports continued to slump (down 9.35% YoY) keeping trade deficit at US$2.67, 35.5%YoY higher. Remittance flows normalized to US$1.76 billion for the month, up 15.3%YoY/32.5%MoM. Going forward, analysts expect trade deficit weakness to persist, which accompanied by the deceleration in remittances growth is likely to keep current account deficit higher during the ongoing fiscal year, if no remedial steps are taken to boost exports and remittances.

Pakistan and its antagonized neighbors

In the recent past, I have posted a few blogs highlighting that Pakistan’s tweaked foreign policy is pushing it towards isolation. This morning I sat down once again to look at the map that is attached with this post. It looked like a crystal ball telling me the following:

• Pakistan’s relationships with three of its neighbors having common border are highly strangulated.
• The incumbent government claims enjoying the most cordial relationship with distant friends.
• United States, China and Saudi Arabia have an immense influence on Pakistan’s foreign policy.
• Russia is also entering Pakistan by offering expertise in oil and gas exploration.

A question arises is being subservient to the global and regional super powers yielding any benefit to Pakistan? My immediate and honest reply is a big NO. The reasons are:

• Pakistan has been fighting proxy US war in Afghanistan but also being the worst victim of terrorism.
• Sunni-Shia breach being extended by clerics receiving financial support from outside.  
• The US, despite being one of the largest investors in China, does not approve Pak-China relationship.
• Afghanistan is being used for cross-border infiltration by India and its supported rebel groups.
• CPEC is being made a controversy by the nationalist, more appropriately rebel groups supported by outsiders.
• Pakistan has not been able to establish banking links with Iran over last nine-month after withdrawal of sanctions due to external pressure.
• Pakistan has not been able to accept the Iranian offer to buy electricity and gas officially, despite getting small supplies in areas adjoining border cities.
• Iran-Pakistan broader remaining closed for days in the aftermath of border conflicts.

There has been an uneven distribution of wealth in the country. Rich are getting richer and poor getting poorer. While elites are busy in minting money the poor are busy in making both ends meet. The nation is being fragmented and hate is being spread to push the country into anarchy.