Pakistan Stock Market Review

KSE logoDuring this past week ended 27th November benchmark of Karachi Stock Exchange, KSE-100 Index closed at 32,960 levels, down by 2.7%WoW basis amid continued tension on the political front and absence of triggers. News flows moving the market included: 1) Enhanced revenue measures as part of a ‘mini‐budget’ remaining under the process of approval, where increase in duties particularly on import of luxury items is expected, 2) ADB initiating loans of US$1.4 billion for power transmission and distribution system maintenance, 3) the National Assembly passing three bills The Anti‐Money Laundering (Amendment) Bill, 2015, The Stock Exchanges (Corporatization, Demutualization and Integration) (Amendment) Bill, 2015 and The Companies (Amendment) Bill, 2015 that includes regulations for treatment of share buybacks and treasury stock, 4) latest MTB auction depicting borrowing of Rs131 billion against a the target of Rs150 billion where cut‐off yields increased marginally and 5) ECC deferring a decision on signing the US$16 billion deal with Qatar for import of LNG citing prohibitive terms, where a consultative body was formed to explore the feasibility of alternatives. Scrips that experienced price appreciation included: EPCL, SSGC, MEBL and PSMC, while laggards remained 1) EFOODS, MCB, HCAR and MLCF. Liquidity remained a point of concern as average daily turnover fell by 18.5%WoW to 143.3 million shares, with volume leaders being TRG, KEL and SNGP. Foreigners remained net sellers with outflows for the week at US$13.1 million as compared to US$15.9 million a week ago. As prolonged consolidation turns into weakness and the index slips below 33,000pts, analysts reiterate their investments case for macro‐hedge, low‐beta; blue‐chip plays as ‘safe haven’ investments. Despite the recent bearish run, the index has offered return of 2.6%CYTD, where analysts see long term investors and institutional participants (banks, mutual funds) building their books in the run‐up to year end.

Apart from continuous monetary easing and regulatory pressures, concerns on asset quality particularly form the deteriorating international book has been an additional distress on UBL’s price performance. In this regard, 9MCY15 provisions were recorded higher at Rs2.6 billion as compared to Rs1.2 billion for 9MCY14 by the bank. Additionally, NPL ratio was 10.2% with Yemen being the key problem area internationally. While the bank has effectively reduced its exposure in Yemen by a sizable 48% to USS17 million during 3QCY15, recent news flow regarding increasing number of SME owners abandoning UAE (slowing economy amidst weak commodity prices) can be another potential threat to asset quality for banks with exposure in UAE. Additionally, anticipation of an interest rate hike in UAE following Fed’s policy announcement in December’15 has raised UAE interbank rates to their highest since July’13. While analysts see some spillover effects on UBL, considering 70% of its international exposure is in UAE (Rs93.8 billion), the impact is expected to be nominal as more than 60% of this lending is restricted to the corporate sector with minimal exposure in oil‐related projects. Although, the sector has underperformed the market by a sizable 16%CYTD, potential reversal of the interest rate cycle in CY16 is likely to rejuvenate interest in the sector where UBL with its diversified business model, consistency in payouts and a dynamic management remains key attractions.

Undergoing a phase of prolonged consolidation, market participants have continued to cite regional weakness as a major reason for the ‘tense’ attitude to investments in the equities. Statistically speaking, the KSE‐100 Index correlation with regional markets has sharply re-coupled (high correlations with consequent narrowing of return dispersions), increasing to 0.6 over CY15 as against 0.4 in CY05. Analysts believe the higher level of co‐integration of Pakistan with regional markets can remain pervasive in the near term on account of the upcoming decision of the US FOMC, where monetary tightening may trigger heightened volatility as global portfolios are repositioned. Domestically, reversal in the interest rate cycle should provide a firm base for performance in the Banking space in CY16 whereas the 4th December meeting of OPEC members remains a major trend setter for the global oil market. That said, Pakistan remains on a firm footing due to: 1) stable corporate profitability, 2) attractive domestic multiples and payouts and 3) expected return to the MSCI EM index following the upcoming review in May’16.

Power sector remains a source for stability, strong yields and improving dynamics, despite being a major source of foreign selling for the year (estimated around US$92 million), underscored by 12.7% gains for CYTD. Analysts base their assertions on: 1) falling risk premiums for the sector signified by softening betas in the space, 2) major shareholders have held firm, in turn solidifying their ownership and 3) monetary easing making yields attractive amidst a flight to yield effect. Additionally, HUBCO/KAPCO has contributed 436/63pts to the index in the year, signifying the cushion they afford to the KSE‐100 index. The key points to watch are financial close of HUBCO’s 1320MW venture and new management at KAPCO expected to renew their PPA and expand on growth ventures.

 

Index down by down by 2.7 percent, liquidity crunch, selling by foreigners

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