Pakistan Stock Market Review

KSEDuring the week ended 18th September Karachi Stock Exchange remained soft, with benchmark KSE-100 Index receding 2.71%WoW to close at 32,761 points, despite an improving macro environment. News flows during the week included: 1) US Fed keeping interest rates unchanged, while leaving open the possibility for tightening later in the year, 2) SBP reducing its discount rate by half a percent, 3) Fitch Ratings assigning Pakistan a sovereign credit rating of ‘B’ with a stable outlook, 4) GoP borrowing Rs160 billion as against a target of Rs250 billion in the latest Treasury Bills auction with lower cut-off yields, 5) GoP short listing Citibank, Deutsche Bank and Standard Chartered Bank as joint lead managers of the US$ one billion Eurobond issue planned for the current financial year, 5) increase of 7.0%YoY in FDI for 2MFY15, amounting exceeding US$119 million and 6) foreign exchange reserves for the week rising by US$134 million WoW to US$18.7 billion for the week ended 11th September. Participation at the bourse remained sluggish where daily average volume declined by 34.19%WoW to 135.24 million shares. Scrips that lagged most include HASCOL, MCB, SSGC, HBL and OGDC. Foreign interest improved with net outflows of US$4.7 million compared to outflows of US$7.6 million a week ago. Trading is expected to remain listless due to the Eid-ul Adha holidays, where volumes may remain thin. Moreover, noise regarding regulatory actions can further keep market performance under pressure. However, in light of the recent spate of depressed prices and possible bottoming out of the current cycle of monetary easing, analysts see attractive valuations in the banking sector.

After an impressive CY14 (net profit growing by 42%YoY), CY15 has so far come up with a string of negatives for the banking sector. Margins reduced due to introduction of stringent regulatory measures amid continuous monetary easing on one hand and heightened taxation measures on the other has kept the sector’s price performance under pressure. While net interest margin (NIM) compression is now a new normal which is likely to confine the sector’s earnings growth to mid-single digit across over the next few years, analysts believe underlying improvement in asset quality and exciting prospects for capital gains can be key mitigating factors from a near to medium term perspective. Additionally, big ticket projects earmarked under the China Pakistan Economic Corridor (CPEC) are likely to stimulate advances growth of the sector during CY16 and CY17. In this backdrop, front line banks with a greater lending thrust should be better positioned to counter pressure on margins. From an investment perspective, analysts believe the recent underperformance (down 11% CYTD) has opened up valuations for the sector where most of the scrips are available at handsome discount to their historical 3-year average. With the worst likely over, analysts suggest accumulation in selected banking scrips should be considered from a medium to long term perspective.

Following China’s move to devalue its currency against the US$, global currency markets have faced similar depreciation in currency parities due to risks of comparative devaluation across the region. Alike other regional currencies, PKR also followed a similar trend where the PkR/US$ parity has lost 2.27% in the interbank market since. Additionally, due to weak exports, domestic textile players continue to lobby for further currency devaluation to stimulate exports. That said, looking at the demand-supply equation, worldwide consumption growth rate and global production for cotton is likely to remain tepid, which is expected to extend current issues ranging from piling up of global yarn stock to reduced yarn margins (intense competition and lower demand).

While The KSE-100 index has exhibited choppy movements HUBC delivered attractive returns. Remaining firm on positive outlook on the scrip, analysts flag: 1) favorable movement in indexation factors, namely US$/PKR and US CPI, 2) improved efficiency of the base plant due to the recently completed overhaul and 3) furnace oil prices remaining low (PSO notified prices slid by 34% FYTD) keeping liquidity concerns at bay, as reasons for upgrading earnings over the next two financial years. Furthermore, upside to earnings include 1) rationalization of O&M expenses as Hub Power Services takes over operational control of the base plant, 2) one off from the planned de-merger of Narowal by December 2015, with a possible stake sale delivering gains.



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