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Market down as political chaos linger; FOMC, PAMA meeting and sukuk issue may favor

The political turmoil plunged the benchmark Index of Pakistan Stock Exchange (PSX) by 930 points(down 2.33%WoW) closing at 39,080 points for the week ended 8th December 2017. OGRA’s adamant stance towards the implementation of proposed tariff regime for gas utilities dragged Sui twins down by 12.7/12.3%WoW respectively. While PSO and KAPCO slid 7.26/13.94% WoW respectively on the news that PSO suspended furnace oil imports further aggravated by the resumption of second LNG terminal (after a brief breakdown). PSMC rallied as the auto assembler announced the launch of 4 new products including the auto-transmission version of Cultus and Mega Carry.

In this scenario, investors preferred to play with small cap scrips and the volume leaders where: WTL, KEL, TRG, JPGL and ANL, pushing overall volumes up by 8.74%WoW to 141.27 million.

Other highlights of the week were: 1) US Defense Secretary meeting the high-ups of Pakistan acknowledging the efforts of Pakistan against war on terror, 2) PSX proposing to widen existing scrip-level circuit breakers to maximum 15 percent, 3) Sindh notifying an additional subsidy of Rs9.3/kg on sugar exports, 4) CPI going up 3.97%YoY during November and 5) foreign reserves jumping to US$21 billion after the country received US$2.5 billion through auction of Sukuk and Eurobond.

Performance wise, scrips leading the bourse were: PSMC, PPL, NCL, NML and POL, while laggards included KAPCO, FCCL, PSO, EFOODS and ASTL. Foreigners bought shares worth US$1.04 million during the week, as against a heavy selling of US$39.54 million a week ago. Market is likely to react to auto numbers due to be released next week by PAMA. On the international front, next FOMC meeting, where its hawkish stance might create further pressure on the sustainability of exchange rate parity at its current levels.

During November 2017 PSX witnessed an extension of the prevailing bearish momentum, with the benchmark index losing 1.1%MoM. A 21-day long Dharnain the federal capital culminated at the resignation of the Law Minister. The anticipated foreign selling (on MSCI portfolio rebalancing) kept investors’ sentiments lackluster.

Foreigners adjusted their portfolios; cumulatively selling US$51.8 million worth of equities, bulk of the selling was recorded before the month ended. Local investors remained risk averse where the lack of involvement was clearly reflective in lower trading volumes/value (down 23%/18%MoM) during the month under review.Apart from Oil & Gas (up 3.3%MoM in rising oil prices) and Automobiles (up 2.4%MoM on anticipated model launches), performance of the mainboard scrips remained unexciting.

 

Analysts expect that the last month of the year may be triggered by: 1) on successful Eurobond/Sukuk issue) and 2) ongoing hike in international prices of crude oil benefitting heavyweight Oil & Gas sector. Oil & Gas posted a positive return of 3.3%MoM on extended production cuts by OPEC members. Other sectors posting gains were: Automobiles (up 2.4%MoM on anticipation of model launches), Electricity (up 1.3%MoM led by KEL) and Commercial Banks (up 1.1%MoM on attractive value propositions). Laggards included Food Producers (down 5.2%MoM on poor earnings performance), Textiles (down 1.9%MoM on weak fundamentals), Cements (down 0.3%MoM on higher coal prices despite improvement in dispatches) and Chemicals (down 0.5%MoM on profit-taking). Portfolio rebalancing was evident during the month under review following MSCI’s semi-annual index review where Pakistan’s weight was reduced. As a result foreigners resorted to selling equities worth US$51.8million during the month. Bulk of the selling was witnessed towards the end with cumulative sale of US$32.4million during the last two days. Sectors witnessing sale were: Fertilizers (US$34.5million) and Commercial Banks (US$20.6million). The only sector witnessing buying was Oil&Gas sector with a net inflow of US$16.2million.

Total cement dispatches during November2017 rose by 4.8%YoY to 3.93million tons, but declined by 6.9%MoM evident from the data released by APCMA. Local offtake declined from 4MFY18 dispatches posting growth of 25.6%, on account of construction activities losing pace as winter approached. Exports remained under significant pressure with figures showing a significant 26.4%YoY /20.5%MoM decline due to trade barriers imposed by Afghanistan. Cumulatively, 5MFY18 dispatches were up 13.8%YoY as compared the corresponding period of last year to 18.50million tons primarily driven by strong domestic consumption, while export growth decelerated. Post seasonal decline, analysts expect domestic demand to pick up pace with the Government of Pakistan keen on swift completion of public projects during the election year, evident from 20%YoY higher PSDP disbursement in 5MFY18. With pricing concerns coming to the fore alongwith fundamental pressures (rising coal prices), the cement sector has undergone steep correction (down 44% since May 2017). While pricing risk remains as additional capacity streams online, analysts base their investment case on: 1) strong domestic demand growth and 2) discounted valuations. Companywise, MLCF and FCCL emerged as star performers for the month with dispatches growing by 5.6/3.0%MoM, while DGKC, LUCK and PIOC witnessed a downtrend.

Engro Corporation, a leading business conglomerate in Pakistan has signed an agreement with the International Finance Corporation (IFC), a member of the World Bank Group, to explore growth opportunities in the country’s underdeveloped logistics sector. Under the agreement, Engro would devise integrated solutions for products that require temperature controlled logistics (TCL), such as agricultural produce, medicines and perishable food commodities amongst others. It would co-develop opportunities with IFC in the temperature controlled logistics industry of the country.

Engro is fully cognizant of the fact that the country loses approximately 35 to 40 percent of its production of fruits, vegetables and dairy products due to poor post-harvest management practices. Pakistan’s performance on most logistical indicators, including the quality of trade and transport infrastructure, lags behind many emerging Asian countries.

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