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Stocks readying to rally despite ending week on flat note

Market seems to be consolidating amidst results announcement, amplified corporate actions and selective investor sentiment following monetary tightening by State Bank of Pakistan (SBP). The benchmark index of Pakistan Stock Exchange (PSX) closed the week ended 2nd February 2018 almost flat at 44,301 points. Key news flows during the week were: 1) Tahirul Qadri announced that his party has shelved its strategy of protests on the Model Town incident, 2) contrary to the market expectations, SBP raised the policy rate by 25bps citing escalating inflationary pressures and tightening stance by other central banks as the justifications for the hike, 3) the Election Commission of Pakistan announced that polling for the Senate election will be held on 3rd March 2018, as the term for 52 incumbent legislators concludes, 4) Drug Regulatory Authority of Pakistan notified new drug prices with upward revisions in accordance with Drug Pricing Policy 2015, and 5) the Finance Ministry notified increase in the prices of POL products.

Gainers at the bourse were: BAFL, APL, PSO and PTC, whereas laggards were: MLCF, GWLC, UBL and LUCK. Average daily trading volume declined by 7.3%WoW to slightly above 255 million shares. The volume leaders were: WTL, LOTCHEM, DCL and FFL. With earnings season in full swing (EFOODS, EFERT announcing results in the coming week), analysts expect volumes to sustain, tapering somewhat due to the shorter trading week due to the holiday on 5th February on account of Kashmir Day.
After a prolonged period of lackluster performance, the year 2018 started on a positive note at Pakistan Stock Exchange (PSX), recording monthly gain of 8.8%MoM in January 2018 (the highest return during month of January since 2008). Foreign buying remained the most dominant driving factor behind the recovery with foreigners purchasing equities worth US$85.7 million during the month. Other impetus included: 1) the GoP supporting rupee flexibility and planning to implement tax reforms ahead of general election and 2) an unexpected interest rate hike of 25bps during the month under review improving sentiments further in index heavyweight banks.

The key sectors benefiting included: Pharmaceuticals (+18.4%MoM on GoP’s approval of linking drug prices to CPI), Cements (+17.2%MoM on restriction on expansions particularly in Punjab following Supreme Court’s order allaying concerns on price war), Oil Marketing Companies (+10.2%MoM on stability of FO demand post shutdown of FO based plants) and Commercial banks (+9.5%MoM on earlier than expected reversal in interest rates). Going forward PSX is expected to continue to yield positive returns; gains may be more tepid now given the swift pace of recovery. That said, bouts of volatility cannot be ruled out over political noise.

During this past week, PSX signed an agreement with the Chinese operator of Gwadar port to facilitate companies in the city’s free trade zone in raising funds from the capital market. Prime Minister Shahid Khaqan Abbasi along with other Chinese and Pakistani government officials witnessed the signing ceremony of a memorandum of understanding (MoU) between PSX and China Overseas Ports Holding Company Pakistan (COPHC) in the port city. The primary purpose of MoU is that PSX will make its best endeavor to help and facilitate the investors/businesses/companies in the Gwadar free trade zone so that they can raise funds from the exchange.


While the ruling junta continues to say it need not approach International Monetary Fund (IMF), the lender of last resort, to overcome the balance of payment crisis, it is borrowing at very high interest rates to meet its debt servicing obligation. It appears that after consuming US$2.5 billion it borrowed two months ago by issuing two sovereign bonds, the incumbent government intends to float another Eurobond this month to raise around US$1 billion amid fast depletion of its foreign currency reserves. Unlike the past when the government pursued road shows to lure investors, an exercise that consumes more time, this time the Finance Ministry has decided to explore the tap off option. The option will be deemed as an extension of the last bond issue and save time. In the tap off option, the ministry would not require hiring financial advisers afresh and it will build on the offers that Pakistan received in November 2017 when it raised US$2.5 billion. The government will issue the 10-year dollar denominated Eurobonds.

The International Development Association (IDA) will make an allocation of $200 million as a ‘performance based grant’ to help 16 urban local governments in Punjab to deliver improved urban infrastructure that will help in enhancing economic growth and development, besides ending extreme poverty and promoting shared prosperity. The ‘Punjab Cities Program’ has been developed to support building systems in the 16 selected secondary cities for more transparency, accountability and responsiveness to citizens, putting them on a structured path towards fiscal sustainability and provision of improved municipal services.

Repatriation of profits and dividends by foreign companies operating in the country increased by 30% during the first half of current financial year as compared to the same period last year. The State Bank of Pakistan (SBP) reported on that the country paid US$1.202 billion as profits and dividends during July-December 2017 period as compared to US$928 million during the corresponding period last year. The net foreign direct investment (FDI) fell during the six months while the payment on FDI rose considerably. The net FDI in FY18 stood at US$1.382billion whereas the payment of profits and dividends on FDI was US$1.055billion, constituting 76% of the total FDI.

In line with market expectations, Fauji Fertilizer Company (FFC)has posted unconsolidated profit after tax of Rs4.78billion (EPS: Rs3.78) for 4QCY17 as compared to net profit of Rs4.28billion (EPS: Rs3.36) for 4QCY16, an increase of 12%YoY. On a cumulative basis, CY17 earnings were reported at Rs10.71billion (EPS: Rs8.42) as compared to Rs11.78billion (EPS: Rs9.26) for CY16, down 9%YoY. Along with the result, the Company also paid a final cash dividend of Rs3.0/share taking CY17 total payout to Rs7.0/share.The increase in 4QCY17 earnings can be attributed to: 1) a 17%YoY growth in topline (including other income) on account of higher urea prices and healthy urea/DAP offtake of 824,000 tons and 176,000 tons respectively during the period, 2) decrease in distribution and finance cost and 3) lower effective tax rate of 27% for 4QCY17 against 30% for 4QCY16.

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