During the week ended June 5th, strong performance was witnessed at the Karachi Stock Exchange (KSE) with benchmark KSE-100 index recording gains of 2.89%WoW. Despite apprehensions about federal budget, with dampeners such as proposals for increase in Capital Gain taxes (CGT), the market retained its positive tone, partially on the back of MSCI FM Index’s semi-annual revisions to component weights coming in to effect this week. This contributed to higher foreign interest and FIPI inflow was recorded at US$23.5 million as compared to that of US$14.9 million during May2015. Volumes also depicted a healthy trend averaging at 315.59 million shares for the week, up 69.51%).
During the week under review, major news impacting the market included: 1) CPI based inflation for the month clocked in at 3.16%YoY, higher than 2.11%YoY recorded for April’15, a trend expected to continue on the back of rising food prices in Ramadan season, 2) Increased prices of petroleum products by up to Rs3.5/ltr for the month of Jun’15, pushing the new petrol price to Rs77.8/ltr and 3) Nepra approving a refund of Rs2.08/unit to consumers overcharged by power Discos in March’15 under the monthly fuel price adjustment mechanism. Within the broader market, major movers included: MLCF, AGTL, NCL and UBL. Conversely, PTC, MEBL and KAPCO were the laggards.
In the coming week market performance will be driven by the Federal Budget for FY16 and impact of various proposals on different sectors. Imposition of an additional CGT slab of 7.5% on securities held for 2‐5 years, along with nearly 2.5% increase in other slabs, could be a short term drag on the market. Sector wise, Cements will be a key beneficiary where high allocations to development expenditure (PSDP expenditure up 29%YoY to Rs700 billion) and CPEC infrastructure projects, if materialized will boost demand. For banks, all sources of income (dividend income & capital gains on equity portfolio) are now to be taxed at a flat rate of 35% against the charge of 10% earlier. On the textile front, the export oriented sector has been incentivized by the GoP by reducing the Long Term Finance Facility (LTFF) & Export Refinance Facility (ERF) to 6% and 4.5% respectively.
Since the last week of May’15, trading activity at the KSE‐100 Index has witnessed a sudden jump (70.7%WoW) as average daily turnover exceeded 168 million shares. This performance is in line with the average 15 year data for the same period (final week of May before the budget announcement) where average daily traded volume at the bourse historically rose by 22% on WoW basis.
Moreover, the first two trading days in Jun’15 has kept pace with the momentum generated in the previous week ‐ daily turnover averaging to 289 million shares and the KSE‐100 Index yielding 2.5%, more than making up for 2.0% it lost in May’15. This has raised questions in the mind of many with respect to the unexpected change in activity. In relation to this, many believe it is a function of diminishing disconnect between the KSE‐100 Index’s price performance and the macro‐economic improvement. Though, analysts agree with the aforementioned reason, they also believe that a big part in the market’s run in terms of rising average daily turnover has been played by ample availability of liquidity with both locals and foreigners. With regards to the former, institutions/individuals with sizable cash positions (to offset market volatility before the budget announcement) have rushed in to realign their portfolios while foreign participants are rebalancing. Keeping these developments in mind, analysts reaffirm their December’15 Index target of 37000 points. That said, analysts believe fresh liquidity will also play a key role into P/E rerating theme, providing it with a potent boost.
International oil prices posted a 10% recovery in CY15TD after recording a 59.4% decline to US$44.48/bbl in Jan’15, as compared to US$109.71/bbl in Jun’14. Despite this recovery, the listed Oil & Gas space has registered negative growth of 3.5% CY15TD, which compares unfavorably when compared with the KSE‐100 Index’s return of 5.5%, under‐performing the market by 8.0% CY15TD. That said, with the Organization for Petroleum Exporting Companies (OPEC) scheduled to meet in Vienna during first week of June, oil prices have marginally risen in Jun’15 to date despite the fact that a production cut from OPEC seems highly unlikely amid fears of deterioration of oil market share amidst increasing production from members like Iran and Iraq.
Moreover, there are concerns that OPEC might continue to break the 30 million barrel production ceiling in the months to come as “Price Doves” (the likes of Saudi Arabia, Kuwait, Qatar and the UAE) are likely to maintain their market share. Conversely, the “Price Hawks” that include Venezuela, Iraq, Iran, Nigeria, Libya, Ecuador and Angola, are in favor of production cuts due to fiscal deficits. With regards to these developments, going forward another dip in international oil prices can keep performance of Pakistan Oil and Gas sector in check and keep it hinged on production growth and widening parity between Pak Rupee and US$ . Having 20%+ weightage in the KSE‐100 Index, Oil and Gas sector has sizably under‐performed the market by 37% in FY15TD.
Within the cement industry, local cement manufacturers dispatched 3.03 million tons of cement in May’15 as compared to 3.07 million tons dispatched in May’14, down 1.2%YoY. Faltering exports remained the chief reason behind the above mentioned YoY decline in aggregate dispatches. Conversely, local dispatches depicted a stellar performance not only in May’15 (up 6.8%YoY) but also in 11MFY15 (up 7.9% YoY). Concerns with respect to achieving near (full) capacity are overplayed in analysts’ opinion as during the previous bull cycle (FY05‐FY08), average local capacity utilization was registered at 73% while during the last 3 years (11MFY15 included), same has averaged at 59%. Looking at these figures analysts believe the decline in exports may not adversely impact the sector’s dispatches as local demand is likely to grow between 5%‐7% in FY16.