Karachi: After securing 5th position in terms of highest return in the world, No one in MSCI Frontier Markets and standing at the top amongst the Asian peers in 2016, Pakistan Stock Exchange PSX is now poised to achieve 56,000 milestone during the current year, 2017. China Pakistan Economic Corridor CPEC and Pakistan’s inclusion in MSCI Emerging Market Index will play key role in the upward journey of the capital market.
Pakistan’s market was trading at a PE of 9.7x in 2016 which can potentially re-rate to 10x in 2017. Pakistan is still trading at a discount of 23 percent and 29 percent discount to MSCI FM and MSCI EM markets respectively.
Cements, Consumers goods and auto sectors, Oil & Gas Marketing and Steel sectors are expected to perform better in year 2017. According to analysts these sectors may be prime beneficiaries of rising domestic demand and expansion activities led by CPEC. During the last year, 2016, PSX generated above average gains. KSE 100 Index gained 46 percent compared to last 10-year average return of 20 percent and last 20 year average return of 24 percent.
Amongst Asian markets Pakistan remained on top. Moreover it also remained No 1 in MSCI Frontier Markets. As shown in accompanied table, according to Bloomberg, Pakistanmarket posted 5th highest return in the world.
Strong performance of Pakistan equities in 2016 was mainly led by strong local cash liquidity thanks to falling interest rate and rising investor confidence. Economic recovery positively affected local demand for various sectors, rebound in oil prices, better security situation and exuberance onPakistan’s reclassification in MSCI EM Index also helped, noted analysts at Topline Securities.
Automobiles and Cement remained top performing sectors in 2016 posting market cap gains of 73 percent and 66 percent, respectively. Index heavy weight Oil & Gas Exploration sector (E&Ps) was up 52 percent whereas banks were up 33 percent. Fertilizer sector was down 5 percent due to weak fertilizer demand and high inventory levels. The Fertilizer sector is likely to recoup some of losses in the backdrop of Urea off takes. Besides, If Govt. allows export of fertilizers, it could help reduce inventory levels of the sector and thus result in cost savings.
Amongst top 30 stocks in terms of market capitalization, Pakistan Oil Fields (POL), The Searle Company (SEARL) and Mari Petroleum (MARI) remained top performers posting gains of 112 percent, 106 percent, and 98 percent in 2016.
Average volumes were up by 14 percent to 281 million whereas average value was up only 2 percent to Rs 11.6 billion in 2016. In the derivative market, traded value in single stock futures stood flat and remained at Rs 3 billion a day in 2016 as against Rs 3.1 billion in 2015.
Margin Trading System (MTS) financing rose by 86 percent in 2016 to reach Rs9 billion while open interest in single stock futures was up 100 percent to Rs11 billion. In spite of rising leverage the financing rate in MTS fell from 9 to 8 percent at end on 2016 and similarly average ready future spread fell to 8 from 9 percent.
For the listing of new entities , despite booming market, stock market witnessed just 3 initial public offerings in 2016 with amount raised of Rs 4.2 billion as against offering of Rs116 billion seen in 2015.
Falling interest rate and maturity of high yielding government securities has been supporting the local equities. This is likely to continue in 2017 also. Government also took new taxation measures for real estate sector in 2016 which has also led to investors shifting to equity market.
Smooth transition of New Army Chief, political stability and improving security situation has also been a welcome development for the market in 2016. This has positive implications on investors confidence. Resultantly, SBP-IBA consumer confidence index was up 3 percent in 2016.
Sale of 40 percent strategic stake in Pakistan Stock Exchange to Chinese Consortium valuing the exchange at $215 million. Investors now hope of new products and better governance that will go a long way in the development ofPakistan capital markets.
During the year 2016, improvement of economy also played important role in supporting stock market rally. The economy grew by 4.7 percent in FY16 compared to last 3-year average growth of 3.9 percent. Meanwhile, Forex reserves increased by 12 percent to reach $23 billion at end of 2016. Policy interest rate reached multi decade low of 5.75% mainly due to lower inflation.
Pakistan also saw rising mergers and acquisitions (M&A) transactions in 2016. Dutch firm, Friesland Campina, one of the world’s largest diary company, bought majority stake in Engro Foods for $450 million. Turkish firm Arcelik also bought Dawlance Pakistan for $258 million. Banking sector also saw a major merger activity when MCB Bank announced its merger with NIB bank at an estimated deal size of $166 million. Moreover, Shanghai Electric has informed that they will buy majority stake in K-Electric (KEL) with deal size of $1.7 billion.
During the outgoing year foreigners remained net sellers with approximately buying $3 billion and selling $3.4 billion worth of shares, resulting in net selling of $350 million. Analysts attribute this selling to global fund flow to US after hopes of increased infrastructure development post presidential election and rise in US interest rates. Most of the selling by foreigners was seen in Oil & Gas Exploration, Fertilizer & Commercial Banking sectors.