KSE November Performance and Future Outlook

KSEBenchmark of Karachi Stock Exchange, KSE-100 Index gained 2.7%MoM (2.9%MoM in US$ terms) during November’14, taking CY14TD returns to 23.5% (22.2% in US$ terms). This marks the 8th month in CY14TD where the market has posted positive returns, which is at par against past 5 year average. With an expectation of another 50bps reduction in discount rate to be announced in January’15, analysts believe leveraged sectors will remain key performers going forward.

November’14 return of 2.7%MoM compares favorably relative to CY14TD average monthly return of 2.0%. It is believed that improved performance for the month was mainly driven by: 1) SBP’s decision to reinitiate a fresh cycle of monetary easing, 2) easing out of political volatility and 3) successful issuance of US$ denominated Pakistan Sukkuk. This led to the market overlooking negatives such as the deferring of secondary offer of OGDC shares due to lower international prices o0f crude oil. Average market volumes increased by 44% to 253 million shares during the month under review in Nov’14 against 176mn shares in Oct’14 indicating improving confidence.

Amongst 10 major sectors (covering 88% of the KSE-100 Index market cap) while 7 yielded positive returns, 3 posted negative returns. Oil & Gas (down 5.1%MoM owing to continuous decline in international oil prices) led underperformers followed by Banks which recorded negative returns of 2.2%MoM on the back of lower spreads. Conversely, Pharma (up 17.7% on the back of drug pricing development), Cements (up 10.9% due to 50bps rate cut by the SBP) and Electricity (up 8.0% as investors moved for high dividend yielding IPPs) remained top performers.

During the month market witnessed 62%MoM increase in activity as with traded value rising to US$136 million against US$84 million in October’14. Foreign investors bought (net) equities worth US$36.3 million as compared to net sell of US$31.1 million in the previous month. This was followed by mutual funds as they increased their equity exposure by net US$16.2 million following net buy of US$8.7 million in October’14. Conversely, net sell of US$27.6 million suggests that Banks and DFIs booked profits. Profit taking stance was also seen from individual investors as they sold net equity amounting to US$34.4 million in Nov’14 as opposed to net buy of US$4.5 million in the previous month.

With inflation expected to remain subdued over the course of next three months coupled with improvements on the macro-economic front (issuance of Sukkuks and stake sale of ABL and HBL), going forward analysts believe the SBP will be continuing its monetary easing cycle. Resultantly, they see interest rates going down by another 50bps and expect this will reinvigorate price performance of leveraged sectors.

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