Historically, the Pakistan Stock Market (KSE100) reached an all time high of 52876.46 in May of 2017 since a record low of 538.89 in June of 1990. At the close of the last session of the year 2016 the Pakistan Stock Exchange (PSX) was calculated to have provided total return of 46 percent for the year. This put Pakistan as the best performing market in Asia and the fifth best among the world markets. The PSX return of 46 percent also stood out as the best in MSCI Frontier Markets and compared favourably with the PSX average gains of 20 percent over the past 10 years and average return of 24 percent over the last 20 years.
Strong performance of equities was mainly led by ample local cash liquidity on account of falling interest rate and rising investor confidence. Pakistan economy grew by 4.7 percent in fiscal year 2016 compared to last three-year average growth of 3.9 percent which positively affected local demand for various sectors; rebound in oil prices, better security situation.
The average volumes at the local bourse increased by 14 percent to 281 million shares in 2016, the average trading value was up only 2 percent to Rs11.6 billion. Among top 30 stocks in terms of market capitalization is Pakistan Oilfields. The Searle Company and Mari Petroleum remained top performers posting gains of 112 percent, 106 percent and 98 percent respectively, in 2016. Automobiles and cements also remained best performing sectors in the outgoing year, posting gains of 73 percent and 66 percent.
Index-heavyweight oil and gas exploration sector was up 52 percent whereas banks provided 33 percent return. Fertilizers sector was down 5 percent due to weak demand and high inventory levels. The only disturbing aspect for investors during 2016 was that while the local funds bought $300 million and non-bank firms $225 million worth of equity, foreign investors stood out as net sellers of $350 million worth equity. It was higher than 2015 net outflow of $315 million. Much of the foreign sell-off was seen in oil and gas exploration and fertilizer and commercial banks.
There was absence of government divestment of equities in state-owned enterprises and the PSX witnessed just three private sector initial public offerings which raised Rs4.2 billion. Panama leaks, Brexit, Trump, border tensions, political chaos all came and went but the investors stood firm, exhibiting their belief in value and potential of this market.
The top ten contributors to the KSE-100 index consisted of banking, E&P, cement and pharmaceutical companies. Habib Bank Limited emerged as the leading contributor in colander 2016 with an addition of 930 points to the index following the re-rating of banks in the MSCI Emerging Markets Index.
It was followed by Lucky Cement, which contributed 878 points following high demand and increased capacity utilization amidst increased infrastructure development. The E&P and refinery sector did well in the face of recovering gross refining margins as well as inventory gains realized due to the bullish trend in oil prices during calendar 2016. This resulted in Oil and Gas Development Company (OGDC), Pakistan Oilfields Limited and Pakistan Petroleum Limited in posting an impressive contribution to the index.
The fertilizer sector witnessed decline in off-take and overall structural issues that led to lower margins during the year. Similarly, power generation firms such as Kot Addu Power Company, Pakgen Power Limited and Lalpir Power Limited had lower margins due to fuel mix and plant inefficiencies.
The best performing stock in the KSE-100 index was International Steels. International prices turned into their favour; anti-dumping case came out positive for them; capacity utilization went to optimum level; while the company was able to sustain historic margins.
The second best performing stock was Sui Northern Gas Pipeline. Investors favoured this utility company as UFG declined and its asset base showed growth upon which the company was guaranteed return from the government. Institutions, especially mutual funds took liking to this stock. The prospects for SNGP look bright in 2017 as well.
Honda Atlas Cars outperformed in the auto sector after the company launched the new civic that saw its monthly sales double in 2016 as compared to 2015. Oil Marketing Companies (OMCs) and refinery sector stocks also performed impressively. Gross refining margins improved during 2016, while the OMC sector witnessed volumetric growth that benefited companies like Hascol Petroleum and Shell Pakistan. Searle Pakistan was the pharmaceutical story of the year as the company continued its double-digit growth.
In line with market performance, mutual funds also posted positive returns in 2016. According to data compiled by the Mutual Funds Association of Pakistan (MUFAP), conventional equity funds gave an average return of 39.3 percent, and Shariah-compliant equity funds gave average return of 40.7 percent.
NAFA Stock Fund was the best performing fund in the conventional equity category with an outstanding return of 51.45 percent, said a spokesman. According to him NAFA’s top-down investment approach, qualified and experienced investment committee, regular engagement with listed companies and robust fundamental research led to their remarkable performance. Some of the top scrips that helped NAFA Stock Fund in achieving the top spot were International Steels Limited, Indus Motors, International Industries, Attock Cement, Nishat Mills and Kohinoor Textile Mills.
In the Shariah category, the top performing fund for calendar 2016 was JS Islamic Fund with an exception return of 54.11 percent. Top performing scrip for the fund was Cherat Cement.
The outlook for the market going into 2017 remained positive. MSCI inclusion in mid-June, potential re-rating and inflow from emerging market passive and active funds, and CPEC related activity would keep the bulls interested. On the downside, potential risks include currency devaluation, which looks imminent; rise in international commodity prices, which could lead to fiscal pressure; and lastly any political mishap that could turn the tables for the market.
STOCKS INCREASED AND DECLINED
In a unanimous decision, the Supreme Court (SC) has disqualified Prime Minister (PM) Nawaz Sharif in the eagerly awaited Panamagate verdict. This is the third time Nawaz Sharif has left PM office prematurely. Further the SC has also recommended a fresh investigation by the National Accountability Bureau (NAB) in Nawaz Sharif’s involvement in the Panamagate case. In this regard, the apex court has ordered NAB to file the reference in the Panamagate case within six weeks. After the decision, within the first forty minutes of trading from its overnight close of 45,906 points, the KSE-100 index was trading at 45,186.28 points and had fallen 719.48 points. Almost 48.5 million stocks worth Rs3.9 billion had been traded until 11:30 am. And 38 out of a total of 298 stocks traded had advanced, while 251 decreased.
According to a note by issued after the SC’s decision of disqualifying PM Nawaz Sharif, AKD Securities said “The market has been under pressure since the opening bell today, losing 2.57 per cent in intraday trading before recovering to close 1.59 percent down before the prayer break. A sharp knee jerk reaction in the second session today cannot be ruled out as uncertainty regarding PML-N government’s future course in this backdrop can dampen sentiments.”
However, the day which started with investors confused ended with the benchmark KSE 100 indexes at 46,000 levels. The index nosedived to 44,235.94 with a 1,669.82 points loss at open of the second session but recovered all losses in the same. It recorded intraday high of 46,060.55 with a gain of 154.79 points.
The KMI 30 saw a rise from low of 4.21 per cent up 0.14 percent to land at 78,379.50. The KSE All Share Index added 142.21 points to its bag with 213 advancers and 134 decliners. Recovering from the nosedive earlier, the benchmark finally settled 6 points in green. Market participants returned to the market and volumes ticked 327.46 million. 49 percent of total volumes were witnessed in scripts pertaining to the KSE 100 indexes. Azagard Nine Limited (ANL +6.70 percent) led the chart with 24.94 million shares exchanged. Earnings announcement flew in from Security Papers Limited (SEPL -4.10 per cent) for the year ended June 30, 2017. The management reported a surge of 10 percent in sales which pushed gross profit margins up from 33.93 percent to 38.30 percent.
Operating profits inched higher from Rs 6.24 million to Rs 7.88 million which along with increased other income pushed net profits up by 48.63 percent. Earnings per share clocked at Rs 15.82. The script which topped up by 43.17 per cent in the last year closed lower.
Siemens Pakistan Company Engineering Limited (SIEM +4.97 percent) traded on day’s maximum possible price after it made financials for the third quarter public. The company registered a growth of 23 per cent in sales since the previous quarter. This was a rise of 37 percent from the same period last year. Earnings per share jumped from a loss per share of Rs 31.40 in third quarter fiscal year 2016 to Rs 31.94.
I.C.I. Pakistan Limited (ICI +2.31 per cent) and Exide Pakistan Limited (EXIDE -0.01 percent) are expected to declare results in pre-open. Later in the day Fauji Fertilizer Company Limited (FFBL -0.22 per cent), Lucky Cement Limited (LUCK -4.64 percent) are scheduled to announce results.
The uncertainty and political instability which has rocked the PSX since its inclusion into the MSCI emerging market since June has caused a see-saw effect on the stock market. On July 5th Pakistan rupee fell sharply both in the interbank and kerb market to reach a 2.5 year high of Rs 108 from Rs 104.91. The PKR had remained relatively stable since August 2015. According to the International Journal of Accounting and Economics Studies on the stock market fiasco which cited that political events and performance of the PSX were closely interconnected.
Experts attributed the continued sell-off to the US’s decision to seek a hefty penalty for HBL Bank, one of the largest lenders in the country, for failing to comply with regulations in the US. Global tensions over a new missile test by North Korea contributed to the negativity. Close to 130 million shares worth Rs5.99 billion of a total of 349 companies were traded on the market. Stocks of only 59 companies advanced, while 277 declined and 13 remained unchanged.
Commercial banks dominated the day’s trading with 19.2 million shares traded, while technology and textile scrips followed with 192 million and 17.7million shares traded respectively. Brokers and analysts projected the Index would hit 56,000 points by Dec 2017, up another 8,300 points from Jan. Good times continued to roll for the PSX well into 2017. On May 25, the benchmark KSE-100 index hit an intra-day all-time high at 53,124 points upside of 11 percent from Jan 1.
PSX stocks rose on the back of excitement created ahead of Pakistan’s reclassification into an MSCI Emerging market, from a Frontier Market. The inclusion was to be on June 1. Scores of delegations of big brokerages, mutual funds, major listed companies and officials of PSX had hurried the globe, from Wall Street to Hong Kong, before June 01 to gauge the interest of MSCI passive funds in Pakistan. It was on such feedback that every single person was enthusiastic over foreign inflows on the eve of Pakistan regrouping as an Emerging Market (EM). No one had foreseen that Frontier Market Funds, which retain heavy investment of around $7 billion in the PSX, would go on a selling spree. Six companies had qualified for the main MSCI EM index: Engro Corporation, Habib Bank, Lucky Cement, MCB Bank, Oil and Gas Development Company and United Bank. EM passive funds were supposed to target those six.
In anticipation local market participants namely mutual funds, banks, companies, stockbrokers and individuals began to build up positions. They took the cue from the reaction seen in the Dubai and Qatar equity markets, which had received buy orders of $469 million and $160 million between the MSCI inclusion announcement on June 11, 2013 and the actual inclusion on June 1, 2014. Local participants who had accumulated the six heavyweight stocks in anticipation of selling them to foreign funds at a higher price had carried market prices to unsustainable levels. On May 25 at the height of the Bull Run, UBL stock was priced at Rs260; HBL at Rs305; Lucky Cement Rs962; OGDC Rs187; MCB at Rs247 and Engro Corporation at Rs399 a share.
As anxiety gripped the market on the complete lack of interest shown by EM Funds, local investors started to unwind their positions. In the process, the six stocks have seen a major rout. By the close of trading on last Friday, UBL stock price had dropped to Rs222; HBL to Rs260; Lucky Cement to Rs826; OGDC to Rs141; MCB to Rs208 and Engro Corporation to Rs335. Due to their heavy weightage of as much as 70 percent in the KSE-100 index, they blocked the entire market down. From its intra-day all-time high of 53,124 points on May 25, the KSE-100 index at the last closing last Friday plunged 6,265 points or 11.79 percent. Stockbrokers who had accumulated mainly the six big shares but failed to sell-off on time were left holding the dirty end of stick.
Most market participants and even individual investors who were keeping to the sidelines said that political upheaval does cause fear in the minds of a change in government and inconsistency in economic policies.