Karachi, November 16, 2018 (PPI-OT): Pakistan Equity Market – Consolidation Continues
Pakistan Equities (KSE100) rose by 0.66%WoW (272 pts) to close at 41,661. Average daily value traded improved by 2.1%WoW to USD72mn, however average daily volume traded declined by 8.5%WoW to 214mn shares.
During the week, Brent Crude declined by 3.3%WoW and is currently trading at USD67.7/bbl. The decline came on the back of United States of America granting waivers to eight countries on oil imports from Iran. Moreover, anticipation of smooth oil supply from OPEC and Russia (expectations of no production cuts during OPEC December 8, meeting) further brought the commodity lower. A decline in oil prices bodes well for Pakistan where the annual energy import bill is almost as high as the entire Current Account Deficit. Our sensitivity analysis suggests that every USD5/bbl decline in oil prices reduces Pakistan’s annual Current Account Deficit (CAD) by USD800mn.
On economic front, State Bank of Pakistan’s (SBP) foreign exchange reserves declined by 2.5%WoW (USD196mn) to USD7.5bn as at November 9, 2018 (setting a new four-year low). The decline came on the back of debt servicing and other official payments. Total liquid forex reserves held by the country stood at USD13.8bn.
During the week, MSCI announced the results of its Semi-Annual Review where there were no surprises as Lucky Cement (LUCK) and United Bank (UBL) were removed from the Standard Emerging Markets Index and downgraded to the MSCI Small Cap Index owing to reduction in their market capitalizations. Similarly, Honda Atlas Cars (HCAR) and Maple Leaf Cement (MLCF) were removed from the Small Cap Index – again no surprises there as they were both already flagged by us. We estimate that the exclusion of UBL and LUCK can lead to foreign selling of 5-10 mn shares from LUCK and ~20-25 mn shares from UBL by Foreign Tracker Funds (cumulative: USD50-70mn) over Nov-18.
Amongst the listed sectors, Commercial Banks, Cements and Chemicals remained the major drivers contributing 193pts, 94pts and 42pts (71%, 35% and 15%) to the benchmark Index, respectively.
In terms of returns, Synthetic and Rayon, Chemicals and Cements remained top sectors returning 14.9%, 6.7% and 2.6%WoW, respectively during the outgoing week. The Synthetic and Rayon sector performed on the back of improved PSF prices (local PSF prices during Nov-18TD are up 41.6%YoY).
In company specific news flow, Ghandhara Nissan Limited (GHNL) in a notification sent to PSX announced its partnership with Renault Trucks. The company is aiming to assemble 100 units per year with Commercial Operation Date (COD) for the project targeted towards the end of 2019.
Foreign selling for the week stood at USD24.1mn (vs USD9.4mn last week) – with the bulk of selling concentrated in Cement and Banking sectors (likely due to aforementioned MSCI announcement). Amongst domestic investors, Companies and Domestic Mutual Funds remained net buyers and mopped up shares worth USD9.8mn and USD4.7mn, respectively.
Key news this week
IMF wants end to govt’s role in power tariff determination (Energy) – Positive
Pakistan to get $3 billion in aid in next few days: Saudi envoy (Economy) – Positive
C/A deficit down 4.5pc in July-Oct (Economy) – Positive
Reserves hit four-year low (Economy) – Positive
IMF questions revenue, power sector losses – Negative
This week’s top stories
Pakistan Equity Market – MSCI EM Index – Two More Bite the Dus
Equity Market Outlook and Perspective
The last two weeks can largely be termed as consolidation, which was much needed post a sharp rally of 15% from mid-October. Sustainability of the momentum will now largely depend on the conditions laid down by IMF for the economic managers of the country. So far, the news flow emerging out of the ongoing IMF Staff Delegation meetings continues to hint towards the need for increased taxation, further hikes in energy tariffs, privatization of state owned enterprises and reduction in inefficiencies from the energy chain. Amidst this backdrop, we feel some profit-taking can be seen over the coming weeks.