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PSE RECOVERS; ME GEOPOLITICAL TURMOIL, UK ELECTION AND ECB RATE POLICY MAY IMPINGE ON

The benchmark of Pakistan Stock Exchange (PSE) posted a gain of 2.0%WoW this week to close at 49,527 level. Last week the KSE-100 Index had posted a decline of 7.75%. This week, the keen interest of foreign investors resulted in inflows of US$6.5 million as compared to outflows of US$149.5 million a week ago. The daily traded volumes fell by almost 19%WoW to 239.3 million shares. The volume leaders were: EPCL, DSL, DFSM, ANL and ASL. While the gainers were: EPCL, AGTL, ICI, HCAR and INDU, the laggard were: EFOODS, NML, NCL, OGDC and SNGP. During Ramazan, shorter trading hours are expected to hinder any long rallys. Geopolitical turmoil in the Middle East, the outcome of elections in the UK and Monetary Policy decision by the European Central Bank are likely to affect global stock markets as well as Pakistan.

Banks are considered the backbone of any economy and Pakistan can’t be an exception. The sector plays even bigger role being the largest lender to the Government of Pakistan. It also fills the gap due to the absence of medium and long term lenders. According to the data available for the month of April 2017, earning assets of the banks continue to grow at 9%YoY and touched Rs12.3 trillion. While risk-free government remained preferred investment for the banks, there has also been healthy growth of 15.7%YoY in lending to the private sector. While conventional heavy borrowers, Textiles and Food sector topped the list of sectors attracting the most credit, a healthy growth of 27%YoY was witnessed in borrowings by the Construction sector. This can be attributed to the players gearing up for higher infrastructure development in the upcoming years (addition in the Cement manufacturing capacity). Consumer financing also posted healthier growth as banks started focusing high yielding auto finance and personal loans in the current lower inflationary environment. Due to the low interest rates spreads remain under 5 percent. Weighted average banking sector spreads were reported at 4.87% for April. Spreads are likely to remain range bound for the remainder of 2017. As the banking sector ownership is dominated by the private sector, the focus remains on banks enjoys low cost of fund, smaller provisions and substantial investment in risk free government securities.

Imposition of a sudden and complete boycott of Qatar by Saudi Arabia led bloc of Middle Eastern nations (Egypt, UAE, Bahrain and Yemen) has caused unrest among Pakistanis. The Government of Pakistan is likely to stay neutral as the foreign office expresses no intention of cutting diplomatic ties with Qatar, a supplier of LNG to the country. Talking about any adverse impact seems premature and of no consequence because of low reliance on Qatar. Moreover, Qatar ranks a distant 7th place with inbound remittances making up only 2% of total.

On top of all, the Qatari government and related entities have assured its customers that shipments will not face disruptions. LNG imports of Pakistan are on the rise with the agreement signed between Qatar Liquefied Gas Company and Pakistan State Oil Company (PSO) in February last year for fifteen years. Annual contract quantities covered by the agreement extend to 3.75 mtpa (195,000,000 MMBTU), which were instrumental in pushing LNG imports to US$965 million for 10MFY17, expected to cross US$ one billion for the full year. Pakistan’s external economics intersect more closely with the Arab bloc. While remittances from the region have been on a decline these still play a major role in Pakistan’s Balance of Payment, with Saudi Arabia contributing about one-third of total inward remittances, followed by UAE (average share of more than 20 percent. However, the impact may be aggravated if expected pick up in remittances from the upcoming FIFA World Cup 2022 (Qatar) fails to materialize. If the situation persists and oil price move up, it would have a more profound impact on Pakistan’s economy.

Shares of energy sector have special attraction for the investors, even in the declining crude price scenario. The strong sales growth in the POL products of local OMCs continued in May’17 with sales of 2.44 million tons in the month (up 10%MoM), taking 11MFY17 total industry sales to 23.5 million tons (up 11%YoY and crossing FY16 total sales). With cumulative sales remaining high would have a positive impact of low prices, depressed borrowing costs and constrained CNG/fuel alternatives. On the flipside circular debt is also on the rise, which causes liquidity crunch for the entire energy sector from, exploration and production companies to refineries to OMCs.

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