Elixir Securities Limited – Pakistan Equity Market: Weekly Review

Karachi, December 29, 2017 (PPI-OT): Strong Weekly Closing Trims 2017 Losses to 15%

The benchmark KSE100 index gained 1,001pts WoW (2.5%) to close at 40,471pts buoyed by the positivity emanating from the i) appointment of Miftah Ismail as the as Adviser to the Prime Minister on Finance, Revenue and Economic Affairs ii) carry forward of the positive sentiment owing to the passage of the Delimitation Bill by Senate last week and iii) window dressing as domestic institutions looked to end the year on a high.

Overall the benchmark KSE100 index lost 15% during the outgoing year against positive return of 46% in 2016. Amongst KSE100 stocks, the rout was led by Feroz 1888 Mills Limited (FML), Engro Food (EFOODS) and Pioneer Cement (PIOC) which lost 63%, 56% and 53% respectively. On the other hand Colgate-Palmolive (COLG), Pakistan Tobacco (PAKT) and Jubilee Life Insurance (JLICL) outperformed the market returning 58%, 52% and 44%, respectively.

During the outgoing week daily volumes clocked in at 215mn shares marking an increase of 55% WoW led by WorldCall Telecom (WTL: 85mn shares) and K-Electric (KEL: 40mn shares). Overall 2017 witnessed a stark decline in trading activity, with average daily volumes clocking at 236mn shares as compared to 281mn in the year before, marking a decline of 16%. However the value traded remained flattish at USD110mn against USD112mn in 2016.

Insurance companies remained the biggest sellers during the week with USD14.9mn while the same was absorbed by Mutual Funds and Foreigners with net buying of USD13.6mn and 8.9mn respectively.

During 2017 foreigners continued to remain net sellers with outflows of USD488mn in line with the trading activity in 2016. The year marked a drastic decline of 96% in buying from NBFC at USD10mn against USD226 in the year before while Mutual Funds continued to remain the top buyers, mopping shares worth USD217mn.

Equity Market Outlook and Perspective

Looking ahead into 2018 we maintain a positive stance on the market with clarity emerging on political frontas we approach the Senate Elections scheduled in Mar-18. On the economic front the newly appointed Adviser to the Prime Minister on Finance has come in with a clear agenda as he looks to tackle the fiscal deficit by broadening the tax bracket and address current account concerns by offering amnesty on bringing back foreign wealth. He has also remained silent on the PKR/USD exchange rate thus strengthening our stance of another 5-9% depreciation in Pak Rupee – positive for External Accounts as well as flows from foreign investors.

Key news this week

Fitch Ratings says widening CA deficit raises medium-term risk (Economy): US credit rating agency Fitch Ratings on Friday said yawning current account deficit poses medium-term risks to Pakistan’s economy, but it ruled out challenges for balance of payments in the short run.

“The decline in Pakistan’s foreign exchange reserves and widening of the current account deficit since the end of the country’s IMF (International Monetary Fund) programme in September 2016 has raised medium term risks,” Fitch Ratings said in a statement. “Nevertheless, Pakistan is unlikely to face external financing difficulties in the short term.”

Import duties cut on raw materials (Economy): Prime Minister Shahid Khaqan Abbasi on Friday approved reduction in regulatory duties on raw materials in a bid to reduce cost of production of local manufacturing, a senior official told Dawn. The regulatory duty imposed on Oct 16 was reduced to zero percent on 14 items falling under 81 tariff lines.

Toyota cars get pricier by Rs60,000 (INDU): Indus Motor Company (IMC) has increased prices of 1,300-1,600cc cars by Rs50,000-60,000 ahead of the new year. Other assemblers are likely to follow suit. The company’s CEO, Ali Asghar Jamali, attributed the price hike to seven to eight per cent rupee devaluation against the dollar which has pushed up prices of imported components.

Miftah Ismail becomes finance adviser (Economy): The government on Tuesday appointed Miftah Ismail as adviser to the prime minister on finance, reintroducing the Musharraf-era model of economic management. Ismail, a former IMF economist, said broadening the extremely narrow tax base and giving an offshore tax amnesty scheme are his top priorities. The government notified Ismail’s appointment on the same day Rana Afzal Khan was sworn in as minister of state for finance and economic affairs.

CPEC power projects expected to up GDP by 2 percent (Economy): The enhanced power generation capacity, resulting from China-Pakistan Economic Corridor (CPEC) projects, is expected to add two percentage points to Gross Domestic Product (GDP) in the medium to long-term, an official said on Tuesday.

“All the energy projects are aimed at adding 17,045 Megawatts (MW) to mitigate chronic electricity shortfall and provide a reliable support for domestic economic activities and exports,” an official at Planning, Development and Reforms Division told APP.

Profit repatriation by foreign firms jumps 29pc (Economy): Repatriation of profit by foreign companies operating in Pakistan amounted to $935.9 million in July- November, up 28.7 per cent from a year ago.

According to data released by the State Bank of Pakistan (SBP) on Wednesday, the inflow of foreign direct investment (FDI) was higher than the profit outflow in the five- month period.

Questions raised over GE’s flagship power turbines in Pakistan (Power): General Electric’s flagship gas turbines ran into problems in Pakistan earlier this year, leading to delays and lengthy outages at three newly built power stations, according to several senior Pakistani officials and power executives.

There is no evidence that GE’s 9HA-Class turbines have fundamental design flaws. But so far the Pakistani plants, which began running this year, are producing power at levels well below their capacity and the problem was acute in the crucial summer months, when temperatures in the country frequently exceed 40 degrees Celsius.

Pakistan has to repay USD6bn in foreign debt in six months (Economy): Pakistan has to pay USD6bn to foreign creditors in the next six months, announced Minister of State for Finance, Rana Muhammad Afzal. He declared that the next 6 months are crucial for the economy.

On the proposed amnesty scheme for foreign assets, a 2% tax on foreign assets owned for at-least 5 years is under consideration. Income and assets which are repatriated by 15th June 2017 could be subject to a 5% tax. Assets held outside Pakistan which are only declared could be subject to 7.5% tax and foreign currency and bearer assets could be subject to 15% tax.

This week’s top stories

Pakistan Economy – Dec-17 CPI Inflation Expected at 4.8%YoY

We expect CPI inflation for Dec-17 to stand at 4.8%YoY vs. 4.0% YoY in Nov-17. We anticipate 0.8ppt increase (between Dec-17 and Nov-17) to be a result of low base effect (+0.7ppt) from drop in food items price levels last year and 0.1%MoM CPI inflation in Dec-17.

We expect CPI inflation to stand at 5.2%YoY in Jan-18 and jumping sharply to 6% in Jun-18 (due to low base effect of last year), and average at 4.4% in FY18 vs. 4.2% in FY17.

We anticipate status quo to continue and expect 3 interest rate hikes of 25bps each in 2018 beginning from May-18. We highlight that any further shocks emanating from PKR depreciation and global oil prices may result in sharper increase in inflation and interest rates.

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