Pakistan Market FY15 Review and Outlook

pakistan-flagIn the recent past Pakistan enjoyed the status of one of the best performing markets. During FY13 and FY14 it gave stellar performance posting more than 46.5% gains at an average. The trend continued in FY15 but with a lesser magnitude. The benchmark KSE-100 Index posted 16.0% gain and closed at 34,398.9 level. During the period under review, the market touched the peak of 34,826.5 on the back of 100bps reduction in discount rate in Jan’15. Due to an increase in the political noise it also touched a low of 27,774.4. In addition to this average daily trading volumes and values rose to six year of 215.9 million shares valued at US$107.6 million.

This robust performance of the KSE-100 index can be attributed to 44% FY15 decline in the international oil prices which consequently led to a subdued performance by index heavyweight Oil & Gas sector (down 25%YoY). In addition to this, performance of the banking sector (another index heavyweight) also remained lackluster owning to a soft interest rate environment and regulatory overhang. Furthermore, sectors occupying 45% of the KSE market cap concluded the year in the red (down 17%YoY) while 55% of the market posted an aggregate growth of 55%YoY.

Going forward, with oil prices expected to trade in the band of US$50-70/barrel, immediate recovery of the Oil & Gas sector seems unlikely. Additionally, lack of clarity over regulatory overhang dissipating is likely to keep the banking sector performance in check, at least in the near term. On the flip side, valuations in construction related sectors, electricity and selective chemicals are still fundamentally attractive,

FY15 also marked yet another year where improved investor participation was evident at the bourse. Although, the average daily traded volume posted paltry increase of 1%YoY in FY15, the average daily traded value increased by an encouraging 27%YoY. This showcases that investors opted for rather pricy stocks in FY15 than they did in previous fiscal year. During FY15 the net buyers were Mutual funds (US$122.17 million), NBFCs (US$68.2 million) and FIPI (US$38.6 million) along with other organizations (US$40.9 million). Conversely, selling came from Banks (US$137.9 million), companies (US$97.0 million) and Individuals (US$24.5 million).

 Index performance during FY15 was dragged down by some index heavyweights i.e. Oil & Gas (tumbling global oil prices) and Banks (squeeze on margins) with a cumulative weight of 39%. Amongst all 32 sectors, 6 sectors with cumulative index weight of 45% remained in the negative territory as they yielded negative returns of 17%. These included Oil & Gas (-ve 25%YoY), Fixed Line (-ve 19%YoY), Tobacco (-ve 17%YoY), and Commercial Banks (-ve 6%YoY). On the other hand, 26 sectors which made up for 55% of the market’s weight registered 34%YoY growth. Amongst the ones that posted gains, key sectors included Autos (+ve 94%YoY), Electricity (+ve 63%YoY), Construction and Materials (+ve 47%YoY) and Chemicals (+ve 41%YoY).

In the backdrop of key developments which include: 1) improvement in Pakistan’s rating by Moody’s to B3, 2) MSCI’s decision to include Pakistan for EM upgrade review, 3) contained inflation going forward, analysts believe the tone is set for the market to further consolidate on its current gains. Analysts see KSE-100 Index reaching 37,000 points level by the end of CY15. They also believe that FY16 stock picking would be key in realizing majority of the gains. 

 

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