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New year triggers investors’ interest as index climbs on report of China, Saudi Arabia lending

Pakistan Stock Exchange (PSX) started the first week of 2019 on a positive note. The benchmark 100 Index posted a gain of 481 points (up 1.3%), snapping its two consecutive-week losing streak and closed at 37,548 level on 4th January 2019. Positive sentiments this week were driven by reports that China has pledged to lend US$2 billion to Pakistan to shore up its foreign exchange reserves. Furthermore, Finance Minister Asad Umar’s recent statements that the biggest investment in Pakistan’s history from Saudi Arabia will be announced soon, also uplifted investors’ sentiments. Sector-wise Commercial Banks, Oil & Gas Exploration Companies and Fertilizer were the best performing sectors.

Foreigners’ selling for the week was reported at US$0.51 million as compared to US$1.1 million a week ago. This was their 35th week of consecutive selling. Among local investors’, Individuals and Insurance were also net sellers of US$17.7 million, while Mutual Funds were net buyers of US$13.4 million.

The total liquid foreign exchange reserves held by the country were reported at US$13,837.8 million on 28th December2018. The break-up of the foreign reserves position was: reserves held by the State Bank of Pakistan amounted US$7,287.5 million and net foreign reserves held by commercial banks at US$6,550.3 million.

Trading activity remained largely subdued with average daily trading volumes further declining to about 107 million shares, down 3.1%WoW. Key news flows impacting the market during the week were: 1) Finance Minister Asad Umar hinting towards another fiscal adjustment, with likely announcement of mini-budget in mid of current month, 2) markedly below consensus expectations, monthly inflation for December 2018 was reported at 6.17%YoY as compared to 6.5%YoY in November 2018 and 4.57%YoY for December 2017 and 4) US President Donald Trump hinting towards a better relationship with Pakistan, eyeing meet-up with Pakistani leadership.

Key performers over the week were: BAFL, CHCC, ENGRO, PIOC and HBL, while laggards included FATIMA, HASCOL, EFOODS, FFBL and NCL.

Market participants are likely to stay on the sidelines until policy clarity on macro-issues comes through. Key checkpoint in this regard is a potential entry into an IMF program and consequent policy framework. Moreover, ongoing graft hearings in the apex court against the main opposition leaders could lead to limited investors’ participation. However, the start of New Year may trigger foreigners’ interest in a bid to rebalance their portfolios, eventually translating into increased domestic participation.


The benchmark Index of PSX extended its rocky stretch of CY17 (negative return of 15.3%) into CY18 (negative return of 8.4%). Average daily trading volumes declined to 184 million shares, the lowest since 2012. Political activity remained heated, with CY18 being an election year as political accountability riled major political forces, yet macro uncertainty with regards to structural hurdles and addressing the ‘twin deficits’. The sector wise performance was led by exchange rate sensitive sectors (rupee depreciating by 26.6% CY18), with chemicals and textiles outperforming the benchmark index by 20.6% and 10.6%, respectively. Power and E&P sectors despite being hedged to currency devaluation fell prone to sector specific developments (Power: Circular debt and Govt. halting production from FO and E&P: oil price volatility reached an high of US$85.6/bbl and low of US$52.6/bbl). Other factors affecting the market were cumulative interest rate hikes of 425bps in CY18. Analysts expect volatility to prevail in CY19 and negotiating the detail wit IMF to be a major decisive factor.

Market activity could remain dull particularly with rising bond yield pulling up activity in the bond market, evident from mutual fund outflow in December 2018. While not related to IMF program, E&P sector could lend major support to the market, gaining from potentially higher oil prices and depreciation of rupee. Bearish trend in oil prices is likely to turn upside down as unwinding of net long positions by traders weigh on current prices.

A closer look at the performance of oil marketing companies (OMCs) indicates that company wise sales indicates a decline in furnace oil (FO) sales volumes, spilling over to retail fuels as higher pump prices, tough political transition and wider macro-woes factored into POL volumes. Another impact of higher prices and lax regulatory controls was the increase in the sale of smuggled product, predominantly HSD where PSO posted highest decline of 22%, APL 5% and no decline for HASCOL, cumulatively total industry sales of HSD volumes declined by 11%YoY. All listed players underwent volumetric contraction with PSO posting the highest decline of 38% YoY. Cumulative CY18 sales of 20.4 million tons down by 21%YoY comprised of HSD (39%) closely followed by MOGAS (36%) and FO (21%) down by 50%YoY. Rising transportation sector demand (constituting 75.7% of total demand in 5MFY19 as compared to 63% in FY18), slowing sales through long term agreements (power sector demand declining to 13.7% as compared to 25% during the corresponding period of FY18 caused major shift in market share, with PSO enjoying the highest shares (43%) followed by HASCOL (12%), APL (10%) and SHEL (8%) for CY17. Contrasting YoY movements indicates absence of growth, where only one segment (MOGAS) has YoY growth, an irrefutable indicator of a down cycle in industry volumes. Considering hampered volumetric outlook, wider market aversion to circular debt exposures, undue leverage levels and growth multiples suggest focusing the three market leaders.

The construction of Mohmand Dam is expected to finally commence in 1HCY19. With a total PC-I cost of Rs307 billion. The Federal Government is expected to finance the reservoir cost of Rs144 billion, while WAPDA to bridge the shortfall. Dam construction is expected to take 5 years and 8 months and generate meager annual demand of 0.3-0.4 million tons cement beginning CY20. However, a slow pace of construction can result in even lower demand being generated. Players in the vicinity of the dam site are expected to be at an advantage to qualify for the supply contracts where, CHCC and LUCK are likely to see an increase in their earnings with an increase in cement offtake. However, analysts fear significant pressure on prices in North with 9.4 million tons of capacity additions in CY19 and term the incremental demand emanating from construction of dam a drop in the ocean.

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