Pakistan Market: February Review and Outlook

pakistan-flagAfter robust returns in January (+7.2%), a clear shift in momentum was seen at the bourse as the KSE-100 Index came off by 2.4% during February’15. The negative performance was in contrast to the continued run-up in global equities and was despite: strong macro data and buoyant corporate results excluding Oil & Gas. Index heavyweight Oil & Gas has acted as a drag on the market, analysts believe that a change in market dynamics remains the main reason along with liquidity crunch that may continue in the immediate-term. It is believed that the market’s weakness should prove to be transitory with a growing valuation discount to regional markets amidst likely continuation in monetary easing.
Macro indicators consolidated during the month under review. January’15 CPI clocked in at 3.88%YoY which should extend monetary easing while the external account position further strengthened with total foreign exchange reserves reaching US$16 billion and the latest round of talks with IMF proved successful. Positives should continue going forward with the January’15 current account deficit of US$95 million (75% lower than monthly average during 1HFY15) that can be attributed to lower international oil prices. At the same time, political/law and order conditions remained relatively stable with the next checkpoint being Senate elections later this week.
Corporate profitability continues on a buoyant note; profit of non-oil companies were up during 2QFY15 led by Banks, Autos, Cements, Electricity and Consumers, while overall profits were down led by Oil & Gas companies.
Within the mainboard sectors, top performers in February’15 were Autos (+2.8%MoM on strong volumetric sales) and Electricity (+2.0%MoM on buoyant results). However, most sectors remained laagered that included Telecoms, Banks and Textiles. Index heavyweight Oil & Gas came off by 0.4%MoM while Chemicals witnessed some support. Average daily volumes was 242 million shares valued at US$139 million in February, lower by 21%/15%MoM. Analysts partially attribute this tighter liquidity to foreign institutional selling in the month under review with net outflow of US$62.5 million in February. While this is largely due to KEL sponsors divesting a small stake (worth US$65 million), available market liquidity was also influenced by new listings and upcoming SPOs particularly HBL where the GoP’s remaining stake in the bank is worth US$1.2 billion. Even a partial divestment of the same could keep liquidity conditions on the tighter side in the immediate-term particularly if fresh foreign buying fails to materialize. Foreigners were sellers in Banks, Cements and Telecoms and were buyers in Oil & Gas and Food Producers.
Liquidity crunch may continue in the immediate-term that provides an opportunity for fresh investors/those sitting on cash. Analysts believe recent market performance has decoupled from improving macros/resilient corporate profitability that has the potential of pullback with a 50bps reduction in discount rate during March.

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