PSXThe year 2016 seems to be very disappointing, both for the global and Pakistan stock markets. During this past week ending 15th January the benchmark PSX‐100 index declined by 1,511 points (down 4.7%WoW) closed at 31,001 levels. The fall is attributable to global selling pressure and collapse of crude oil prices, Brent slipping below US$30/barrel. Overall, activity at the market remained under pressure with local investors selling off frantically, where average traded volumes for the week rose to 131 million as compared to 120 million shares a week ago.

Key news flows during the week included: 1) OGDC announcing gas discovery of 23mmcfd from one of its exploratory well in Sindh, 2) ECC allowing PSO to sign US$16 billion Sale Purchase Agreement (SPA) with Qatar to import LNG over 15 years with price set at 13.37% of prevailing Brent price, 3) TELE announcing restructuring of its listed TFCs amounting to Rs2.4 billion, issued in 2004, and 4) exports numbers depicting a decline of 14.4%YoY to US$10.322 billion during 6MFY16.

Scrips that performed at the bourse were HUBC, MLCF and NBP, while laggards included HASCOL, EPCL, SSGC and DAWH. Foreign selling showed some recovery this week, where net foreign inflows for the week amounted to US$1.2 million as compared to net selling of US$11.1 million in the prior week.

Sliding of oil prices below US$30/bbl on potential lifting off of sanctions against Tehran’s oil exports, is likely to keep the oil and gas sectors performance under further pressure. That said, upcoming result season accompanied by reasons for earnings surprises remain possible triggers for improving investor sentiment.

CY15 was a turbulent year as geopolitical and economic headwinds depressed global asset returns. The benchmark KSE-100 (now known as PSX-100) Index also lost its bullish momentum, offered return of 2.13% for CY15 as compared to its 3-year average return of 42%). In this backdrop, analysts forecast that market sentiments would largely become ‘event’ driven during CY16. Going forward, Pakistan starts to look more decent for the next 3-year horizon as a fresh tailwind from further weakness in global oil prices can continue to positively impact macros. With a forward 5-years average GDP growth of 5% as against 4.4% for MSCI AP excluding Japan along with materialization of energy and infrastructure projects under China‐Pakistan Economic Corridor (CPEC) to provide additional impetus and possible re‐classification in the MSCI Emerging Markets (EM) space, the current discount of 36% of the KSE100 against the MSCI AP excluding Japan has legs to narrow in the medium term.

International Monetary Fund (IMF) released its staff level report for the recently concluded 9th review under the EFF agreement. While lauding GoP’s progress on the program the Fund stressed on smooth reform implementation going forward. GoP received three waivers on criteria set for the September’15 end quarter, which however have been followed by corrective actions including: 1) reduction in SBP’s NDA to below Rs2.65 billion and 2) imposition of additional Rs40 billion taxes. While forecasting FY16 inflation at 3.7%, the Fund has advised a cautious monetary stance owing to global uncertainties, mulling chances for interest rate cut. Moreover, necessary fiscal side reforms with key areas being 1) revenue collection, 2) circular debt (now at Rs661 billion) and energy subsidies and 3) privatization of PSEs were highlighted. Absence of these is estimated to pull back GDP growth to 3.5% over the medium term. Regarding the next December’15 end quarter review, analysts expect Pakistan to meet targets where provisional tax figures indicate a limited shortfall of Rs5.0 billion.

Lowering global cotton production forecast by 2%YoY to 101.6 million bales for MY2015/16, USDA has released its January’16 edition of Cotton: World Markets and Trade. While reemphasizing upon weakening global demand outlook, the report foresees an improvement in global trade outlook solely accredited to Pakistan, which is now estimated to import 2.7 million bales. This is attributed to lower domestic production where cotton arrivals as of January’16 were down 32%YoY to 9.3 million bales. In tandem, the GoP has also revised downwards its FY16 cotton production target by 5% to 11.3 million bales. In this backdrop, prices have continued their upward trajectory, gaining 4%MTD to stand at Rs5,932/maund, while still remaining lower than the CY15 peak. From an investment perspective, analysts maintain their underweight stance on the sector as they see tough times continuing in the form of 1) lower exports on account of slowdown in China, and 2) cotton oversupply in the region keeping international cotton prices under pressure.

 

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