With announcement of FY18 Deferal Budget and Pakistan’s formal inclusion in the MSCI EM Index, the week ended 2nd June 2017 remained eventful. Contrary to the expectations, fiscal prudence superseded election year populist measures in the Budget, while unexpected tax restructuring for the stock market induced further volatility (15% CGT regardless of the holding period, enhancement of tax on dividend to 15%). On the other hand, the transition to MSCI EM Index triggered a sell‐off on the likely rebalancing of the portfolios. The benchmark of Pakistan Stock Exchange index lost 4082 points or 7.75%WoW to close the week at 48,555. The average daily volumes declined to around 295 million shares, but the average traded value soared to its decade high of over US$240 million. Other key news flows during the week included: 1) Hussain Nawaz appearing before the JIT, 2) CPI based inflation in May’17 rising to over 5%, at 30‐month high, 3) GoP reducing the MOGAS/HSD prices, 4) LHC dismissed petitions filed by commercial importers against the anti‐dumping duty on flat steel products, 5) MoF reportedly agreed to provide Rs45 billion to IPPs and OMCs in lieu of circular debt. MSCI Pakistan EM index large and mid‐cap constituents were major losers during the week, where: HBL, LUCK, UBL, MCB and OGDC.With Pakistan formally part of MSCI EM Index, analysts expect short‐term volatility to continue where the market is likely to take guidance from foreign activity. That said, any development with regards to the revised margin financing product along with Panama‐gate’s JIT proceedings are likely to drive sentiments accordingly. As eventful as it was, the market gained 2.6%MoM during May’17 in anticipation of a populist budget while gearing up for Pakistan’s formal inclusion in the MSCI EM index. However, gains remained limited (the market lost 4% since the presentation of Budget FY18) where, contrary to expectations, fiscal prudence superseded election year populist measures in

Budget FY18. Also, an unexpected tax restructuring for the stock market induced further volatility. On the other hand, the transition to MSCI EM Index triggered a sell‐off with the benchmark index losing 1.7%, just a day before formal inclusion of Pakistan in MSCI EM. In this regard, profit taking was evident in MSCI EM stocks with traded value recorded at US$508.7 million, touching its decade high. Going forward, foreign activity is likely to guide the market sentiments in the short term with the market seeing increased volatility until complete re‐balancing of portfolios. However, analysts expect key themes like: 1) materialization of CPEC projects, 2) healthy corporate earnings growth, 3) interest rate reversal and 4) the pressures on the PkR to take center stage until general elections next year.

Despite widening trade deficit, rising by nearly 37% in 10MFY, focus on export‐oriented sectors remained missing in the recently announced FY18 budget. While relief measures under the export package (zero‐rating regime, discounted EFF & LTTF and duty‐free machinery import) were extended and new protectionist measures introduced (GST @10% on import of fabric and 5% RD on import of filament yarn), no solid initiatives were undertaken with regards to energy subsidy (to reduce power cost) and refund claims except allowing of payment of refunds. Moreover, the 1% increase in GST on retail sales to 6% further add to the woes of industry players having a  higher proportion in the local sales mix should they choose not to pass on the cost increment to consumers.

 

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