Pakistan Stock Market Review

KSEDuring the week ended May 29, 2015 the KSE-100 index gained 1.38%WoW to close at 33,057 points. This marginal improvement can be attributed to: 1) reduction in discount rate by 100bps to 7.0%, and 2) extended foreign interest in the market as portfolios re-aligned according to the changes in weights in the MSCI FM index in its recent semi-annual review, coming into effect from June 2015. While the 100bps reduction was positive for leveraged sectors, banks came under pressure with the introduction of a new target rate, which will further limit their spreads. Average daily trading volume increased by 71%WoW to slightly more than186 million shares as compared to previous week’s average of around 109 million shares. During the week, major news influencing the market included: 1) proposed increase in capital gains tax (CGT) rates on shares traded, 2) money market yields continued to taper after reduction in discount rate, with Treasury Bills cut-off yields declining for 3-months (6.61%), 6-months (6.65%) and 12 months (6.75%) and 3) total federal PSDP for the next financial years proposed at Rs580 billion, up 10%YoY. Of these Rs245 billion will be set aside for power sector projects with an estimated Rs41 billion for projects under the China-Pakistan Economic Corridor. Gaines of the week included: INDU, MLCF, HCAR and AGTL and laggards included NBP, UBL, BAFL and ABL. The market’s performance is likely to remain weak, driven by expectations about budget FY16 due to be presented next week, where analysts expect potential impacts coming through on 1) banks may have to struggle owing to proposals of taxing capital gains and dividends at a flat rate of 35%, further pressurizing their performance after reduction in discount rate, 2) dairy producers likely to face a possible shift from zero‐rated taxation to sales tax exempt regime, being negatively impacted (particularly EFOODS), if approved, and 3) cements sale likely to increase due to PSDP allocation estimated at Rs580 billion, where a major chunk will go towards infrastructure projects, Rs132 billion allocated to NHA.

Detailed data for external trade reflects marginal improvement during April’15, with trade deficit posted at US$1.79 billion, a 19%YoY decline. The balance remained in check with 6.5%YoY decline in imports due to lower petroleum imports, thanks to lower global oil prices. Exports were up 4.6%YoY where food exports grew 18%YoY and heavyweight textile managed to post an increase of 2.9%YoY. Textile, which constitutes over half of country’s exports, were reported at US$1.08 billion in April’15 as compared to US$1.05 billion in April’14. That said, decline in the low value added segment (down 8.5%YoY) overshadowed 9.6%YoY growth achieved by the high value added segment. As GSP Plus status continues to allow Pakistan to export at preferential rates, the country is able to register higher exports due to better rates as well as higher demand for value added goods.

Kharif season got off to a sluggish start as not just urea but cumulative fertilizer sales remained depressed during April’15. According to latest figures released by NFDC (National Fertilizer Development Center), urea sales during the month under review were recorded at 366,000 tons as against 429,000 tons in March’15, down by 14%MoM but higher by 42%YoY. However, DAP offtake during April’15 showed an uptick as sales improved by 41%MoM/78%YoY to 67,000 tons. Urea, offtake figures also look less than impressive when compared with Ministry of National Food Security and Research estimated urea demand average of 500,000 tons per month during the current Kharif season. After incorporating the recent 100bps reduction in discount rate profitability of all the fertilizer manufacturers is likely to improve.

In a surprise move over the weekend, SBP, along with a 100bps cut in interest rate ceiling to 7.0% has formally tightened its grip on the banking sector by: 1) introducing a Target Rate at 50bps below the ceiling rate and 2) narrowing the interest rate corridor to 200bps from 250bps earlier. In doing so, the SBP has tried to limit banking sector NIMs by targeting both, the yield on assets (through Target Rate) and cost of funds (MDR now at 250bps below the ceiling). Assuming other interest rates including KIBOR come off by a similar proportion, average CY15 and CY16 earnings are likely to be affected negatively. That said, counter measures in the form of increasing credit spread and credit offtake exist that can potentially contain the negative impact on earnings. While this is negative development for the sector, analysts see banks with a) a harder thrust towards consumer lending, b) strong international presence, c) higher proportion of non‐interest income in the total income and d) sizeable backlog of capital gains to fare better than the rest of listed companies.







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