Pakistan Stock Market Review

KSE logoAfter remaining considerably volatile, benchmark of Karachi Stock Exchange, KSE-100 Index successfully closed the week ended on 3rd October at 32,970 level, up 0.45%WoW. The marginal recovery came on the back of lower than expected inflation and SECP’s clarification regarding the scope of action against non-compliant entities. Other major news flows during the week included: 1) influx of foreign exchange in huge quantities that included US$500 million from Eurobond of 10-year tenor at a coupon rate of 8.25 percent, receipt of another US$505 million under IMF program and US$375 million under CSF, taking country’s foreign exchange reserves to historic high of US$20 billion, 2) there was increase in GST on petroleum products that kept prices unchanged for the current month – despite international prices hovering at low levels, 3) GoP raising Rs54.7 billion through T-Bills auction, lower than its target of Rs125 billion with cut-off yields remaining unchanged, 4) SBP conducting four OMO’s during the week injecting Rs3.2 trillion into the banking system and 5) finalization of the Auto Policy 2015-18 draft to be submitted to the ECC. Leaders at the bourse during the week were: DGKC, MLCF, AICL and KAPCO while laggards included OGDC, HBL, AGTL and MCB. Daily average volume surged 43.3%WoW to slightly more than 178 million shares. Foreign interest also improved slightly with net inflows of a nominal amount of US$0.22 million for the week compared to net sale of US$1.07 billion a week ago.

Fertilizer sector has shed 1.7% FY16TD, outperforming the broader index which lost 6.4% during the review period. To understand this one has to analyze the factors affecting sector fundamentals. The data released by the NFDC reflect a major decline in fertilizer off-take during August’15 (down 37%YoY / 14%MoM) to 530,000 tons due to seasonal impact. Additionally, increased stockpiling in expectation of escalation in per bag prices kept offtake in check (high base effect). The anticipated DAP subsidy package softened DAP off-take. Subsequently, 8MCY15 off-take remained tepid on a YoY basis, to slightly more than 5 million tons. Urea off-take nosedived (down 32%YoY and 17%MoM) to 430,000 tons largely due to seasonality and subsequent increase in urea prices following gas tariff hike. The analyst believe that off-take in earlier months were elevated as the adverse impact of gas price hike was largely anticipated. Besides FFBL (up 66%YoY and 13%MoM), every major player exhibited decline in their respective off-takes including FFC (down 16%YoY), EFERT (down 13%YoY) and FATIMA (down 64%). DAP off-take also headed southwards (down 66%YoY and 13%MoM). Analysts expect demand to remain subdued in the near term due to a subsidy package being in the pipeline. A subsidy of Rs500/DAP bag is being considered under the ‘Kissan Package’, which may face temporary hurdles (legal impasse as package is deemed to be in violation of ECP rules).

Pakistan’s exchange rate has seen considerable upwards revision since last year, as the economy recovered from a week external liquidity position, strengthening by 5% against the US$ in CY14. In Pakistan’s case, a strong PKR holds multiple implications because. While the economy benefits from relatively cheaper imports (positive impact on CPI), entities with sizable exports (such as textiles which account for more than 50% of Pakistan’s exports) lose ground in terms of competitiveness. That being said, analysts believe the exchange rate is likely to undergo measured depreciation (average 2.3% per annum in the next three years as against 2.5% during the previous three years) as global dynamics continue to weigh and episodes of volatility can reemerge from uncertainties over: 1) regional currency outlook, 2) US Fed rate decision and 3) domestic lobbying to enhance export competitiveness. Analysts see comfort on equity market performance (weak historic correlation of negative 30% between index performance and PkR/US$ movements). Tailwinds from a relatively weaker PkR should benefit sectors such as Textiles, Power and Oil & Gas.

The latest banking sector data for August’15 indicates that banks’ balance sheet continues to grow at strong rate (+24%YoY) to Rs10.8 trillion. While private sector credit growth has not been substantial on account of bank’s continued preference for risk free GoP securities (investments up by 44%YoY/4%QoQ), it still posted an encouraging growth of 7.25%YoY during the month under review. However, consumer financing grew by 9.3%YoY in August’15 (8.5% of the private sector loans) as banks look to refocus on high margin auto finance and personal loans in the current lower inflationary environment. Expecting spreads to bottom out this year, analysts retain their liking for banks that have: 1) the room to benefit from loan growth and having an adequate capital adequacy buffer, 2) achieved economies of scale and 3) a strong non-interest income.




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