During Jan’19 the equity market recorded its largest surge on a monthly basis since Dec’16 (12.2%) as the index jumped up by 3,733 points, portraying a return of 10.1% MoM (USD based return of 10.6% MoM) and entirely washing out the downturn during CY18 (-8.4% in CY18). FY19TD return has clocked in at -2.7% (USD -14.4%). Major reasons behind the impressive performance of the bourse were big wins in foreign policy including melting in the ice with the US, finalization of UAE financial package, positive elements in the economic reforms package announced by the government and foreign inflows.
The domestic equity bourse was showered with foreign interest during the month with net buying set at USD 16mn (a 12 month high). We believe overseas investors’ interest was on account of attractive regional valuation gap alongside PKR stability at 138 post significant depreciation (-23.7%) since Dec’17.
Moreover, in the outgoing month, recovery in investor sentiment was witnessed amid improving positive news flows such as the US President’s desire to meet the country’s new leadership in order to provide impetus to the recovery in bilateral relations.
Moreover, during his short visit to Pakistan, UAE crown prince announced a financial support package of USD 3bn as well as further plans to provide a USD 3bn oil facility. Furthermore, the government announced an economic reforms package which was broadly focused on improving ease of doing business, incentivizing export-oriented/industrial sectors and elimination of domestic growth hampering impediments.
Various other measures (such as abolition of super tax for nonbanking companies, withholding tax abolishment for filers on banking transactions) all contributed towards improving the overall confidence in the equity bourse.
Pertinently, the KSE-100 index outperformed MSCI Developed markets (+7.7% return) while Emerging Markets (+8.7% return) displayed similar returns. Furthermore, the local bourse during Jan’19 ranked 1st in the Asia-Pac region.
Country’s current account deficit (CAD) witnessed an increase of 37% MoM to USD 1.7bn during Dec’18, as compared to USD 1.2bn in Nov’18. During 1HFY19, the deficit has decreased by 4% YoY to USD 8.0bn. Major rise in deficit is driven by 12% (USD 574mn) MoM rise in total imports to USD 5.5bn compared with USD 4.9bn in the last month.
However total exports also increased by 8% (USD 188mn) MoM. Rise of CAD (USD 451mn MoM) is driven by rise in overall trade balance (USD 386 mn). Remittances also increased by 5% (USD 81mn) in Dec’18. In 1HFY19, 16% YoY (USD 863) decline in services imports helped to restrict the overall trade deficit to USD 17.5bn while the CAD clocked-in at USD 8.0bn.
Foreign direct investment (FDI) during Dec’18 has increased by 14% MoM (+17% YoY) to USD 319mn compared to USD 280mn in Nov’18. During 1HFY19, FDI has witnessed a decline of 19% YoY to USD 1,319mn. In Dec’18, FDI from China clocked in at USD 121mn (38% of Total FDI), while decreasing 31% YoY to USD 760mn (58% of Total FDI) in 1HFY19.
Majority investment poured in financial business (43% of Total) amounting to USD 137mn, followed by chemical sector, amounting USD 51mn (16% of Total) in Dec’18.
Other major news includes: Offshore gas exploration started during the month, FATF satisfied with bid to curb money laundering, Furnace oil based power plants made operational, Withdrawal of customs duty, additional customs duty and sales tax on import of cotton, Hi-Tech Alloy Wheels to issue 150m shares, Money laundering to be made non-bailable offence, IMF lowers growth forecast for region and Pakistan.
Average volumes during the month jumped up by 4% MoM to 136mn shares along with average valued traded witnessd slight increase of 2% to USD 63mn. On the local front, Mutual Funds and Brokers remained the largest domestic accumulators with net buy of USD 16.6mn and 8.0mn, respectively while Insurance companies, Banks and Individuals resorted to selling of USD 19.1mn, 9.7mn and 9.1mn, respectively.
Foreigners Track Regional Competitiveness
Analysts at Arif Habib Limited said that violating the norm set in the past 11 months, foreigners remained accumulators during Jan’19 with net buying set at USD 16.18mn (Dec’18: USD -28.41mn). It was highlighted this as the “January Effect” as overseas market participant’s last displayed a bullish stance on Pak equities in Jan’18 and bought stocks worth USD 85.70mn.
In the outgoing month, top sectors preferred by foreigners were Commercial Banks (USD 19.68mn) given enticing earnings growth outlook in the wake of ongoing interest rate upcycle, Fertilizers (USD 2.55mn) amid robust offtake and pricing power, and all other sectors (USD 1.01mn).
Given other regional and emerging markets had also been axed by foreigner investors over the past year, discounts to the US market had widened exponentially. This, once again, opened up valuations and hence, foreigners observed massive buying in the Asia-Pac region: South Korea (USD 3,657mn), Taiwan (USD 1,819mn) and Indonesia (USD 977mn) witnessed huge inflows while India remained the only country that faced outflows worth USD 463mn.
Robust return of the domestic equity bourse was led by heavy weight Commercial Banks (~25.4% weight; +1,225pts; 13.6% return) as enticing valuations of larger banks attracted foreign inflows, followed by Oil & Gas Exploration Companies (~15.5% weight; +939pts; 17.6%) amid exuberance over potential discovery of reserves at the offshore Indus Block G, Fertilizer (~14.8% weight; +694pts; 12.9% return) given expectations of GIDC issue being resolved and robust offtake plus pricing power, Oil and Gas Marketing Companies (~5.5% weight, +176pts; 8.7% return) and Power Generation (~6.0% weight, +158pts; 6.1% return) owing to approval of PKR 200bn Sukuk to counter the circular debt problem. On the flipside, laggards during Jan’19 were Tobacco (~2.3% weight, -75pts; 7.5% return), Paper & Board (~0.5% weight, -10pts; 4.6% return) and Chemicals (~2.4% weight, -9pts; 0.9% return) in lieu of lower chemical margins.
The market likely to remain positive in the near term while, foreign inflows can also positively influence investors’ sentiment.
Additionally, the upcoming visit of Saudi crown price and potential investment and trade deal amounting USD 18bn will keep the local investment sentiment upbeat.
Furthermore, increase in the policy rate by 25bps is expected to bode well for the banking sector.
The KSE-100 index is currently trading at PER of 7.9x (2019) compared to Asia Pac regional average of 12.6x and while offering DY of ~7.0% versus ~2.7% offered by the region. Our top picks are OGDC, BAFL, BOP, UBL, LUCK, FFC, EFERT, NCL and HUBC.