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The calendar year 2014 (CY14) has proved to be another good year for Pakistan equities with benchmark KSE-100 Index gaining over 27.3%. It was also evident that during the period under review activity at the bourse lost pace slightly as daily average traded volumes declined by 6.4% to 208 million as compared to 222 million for CY13. Despite this bullish trend only 4 IPOs made their way to the KSE-100 Index, a level which was previously seen in CY10.
It is pertinent to note that in CY06, where the last time policy rate of the SBP was at 9.5% we saw 3 IPOs taking place at the KSE. It is felt that despite booming market and overall improvement on macro-economic front IPOs have remained on the lower side because raising debt is much more cost efficient for different companies than raising fresh capital at the bourse. None the less, CY14 IPOs compares favorably when pitted against average 3.5 IPOs taking place in the past 5 years and as a result, market’s depth has increased by Rs115 billion, including Rs1,449 million by Saif Power.
Despite booming market fundamentals where the KSE-100 Index grew by 27% (31% in US$ terms) during CY14TD, only 4 IPOs took place at the bourse. CY14 fares well not only when compared with one IPO in CY13 but also against average 3.5 IPOs in the past 5 years. Mostly IPOs in CY14 received overwhelming response from investors as almost all of the 4 companies were largely over-subscribed with Avanceon being an exception.
Those who invested in any IPO during CY14 have been able to punch in superior return against those who invested in the KSE-100. In this regard, EFERT remained the leader, providing 140% return since its formal listing in January’14. EFERT was followed by AVN, which recorded a return of 105%, while EPQL 48% and HASCOL 41% also provided decent returns. Conversely, the KSE-100 Index provided a return of 27%, further affirming the argument that investment in IPOs led to better returns for investors as opposed to KSE-100 Index.
Buoyed by re-initiation of monetary easing cycle by SBP, the KSE-100 Index recently touched its all-time high of 32,006. However, since touching this high, the KSE-100 Index has showed some weakness. This decline came at a time when Pakistan’s regional peers’ performance has been on an upward trajectory as MSCI Asia (ex-Japan) Index rose by 1.2% during the same period. Moving towards more developed markets, analysts saw positive momentum in indices like S&P, DIJA and NASDAQ. While regional (MSCI Asia-Ex Japan) and developed markets (S&P, DIJA and NASDAQ) might not be direct comparable, when pitted against MSCI FM Index, Pakistan seems to be follow the overall FM pattern. This is despite an improving macro-economic environment where inflation is expected to remain subdued over the next 3 months, expected improvement in foreign exchange reserves situation, and likely narrowing down of trade deficit due to 30%FYTD slide in international crude oil price.
Analysts believe the investors were trying to safeguard themselves from negativity due to November30 showdown between PTI and the GoP in-case of a potential spill over. Within this backdrop, with the underlying fundamentals intact, analysts could look towards recent underperformers to rebound swiftly.
The recent slide in the index was majorly brought on by Construction & Materials (down 3.13% having index weight of 6.1%), Banks (down 2.86% with an index weight of 21%) and Oil & Gas (down 2.63% with an index weight of 24.5%). Within Construction & Materials sector, analysts saw market caps of scrips like FCCL and DGKC being marginalized by 6.08% and 4.21%, respectively. This negativity came despite the SBP’s reinitiating of monetary easing cycle, something which was considered to drive Construction & Materials stocks. Similarly, banks like UBL which has an impressive non-funded income stream saw its stock price going southwards by 6.5%. Within the Oil & Gas sector, PPL, NRL, APL, SHEL and MARI underscored the market where SHEL recorded negative return of 5.3% and Mari’s return was realized at negative 10%.
Analysts opine that aforementioned slide in the KSE-100 Index was unwarranted given improvements that were expected to take place on the country’s macroeconomic canvas. That said, analysts belief rests upon peaceful conclusion of the upcoming PTI’s political rally, which will provide fresh impetus to investor confidence. Going forward, analysts believe investors should build up positions in blue-chip companies that have so far been underperformers in the recent slide.
The KSE-100 Index gained 2.7%MoM (2.9%MoM in US$ terms) during November’14, taking CY14TD returns to 23.5% (22.2% in US$ terms) while in FY15TD the KSE-100 Index gained 5.2%. This marks the 8th month in CY14TD where the market has posted positive returns, which was at par against past 5-year average. With an expectation of another 50bps reduction in discount rate taking place in the January’15 MPS, analysts believe leveraged sectors will remain key performers going forward.
November’14 return of 2.7%MoM compares favorably relative to CY14TD average monthly return 2.0%. Analysts believe improved performance during the month was primarily driven by: 1) The SBP’s decision to reinitiate a fresh cycle of monetary easing with a 50bps cut in policy rate, 2) easing out of temperature on the political front and 3) successful issuance of US$ denominated Pakistan Sukuk. This led to the market overlooking negatives such as the cancellation of OGDC’s stake sale on lower oil prices. Average market volumes increased by 44% to 253 million shares from 176 million shares in Oct’14 indicating improving confidence.
Amongst 10 major sectors (covering 88% of the KSE-100 Index market cap) 3 posted negative returns while 7 yielded positive returns. Oil & Gas (down 5.1%MoM owing to continuous decline in int’l oil prices) led underperformers followed by Banks, which recorded negative returns of 2.2%MoM on the back of lower spreads. Conversely, Pharma (up 17.7% on the back of drug pricing development), Cements (up 10.9% due to 50bps rate cut by the SBP) and Electricity (up 8.0% as investors moved for high dividend yielding IPPs) remained top performers.
During November’14 the market saw 62%MoM increase in overall activity as average traded value rose to US$136 million against US$84 million in October’14. Major interest came in from abroad as foreign investors bought (net) equities worth US$36.3 million as compared to net sell of US$31.1 million a month ago. This was followed by mutual funds as they increased their equity exposure by net US$16.2 million following net buy of US$8.7 million in October’14. Conversely, net sell of US$27.6 million suggests that Banks and DFIs booked profits. Profit taking stance was also seen from individual investors as they sold net equity amounting to US$34.4 million in November’14 as opposed to net buy of US$4.5 million a month ago.
With inflation expected to remain subdued over the course of next three months coupled with improvements on the macro-economic front (issuance of Sukuks and stake sale of ABL and HBL), going forward analysts believe the SBP will be continuing its monetary easing cycle. Resultantly, we see interest rates going down by another 50bps and expect this will reinvigorate price performance of leveraged sectors where we see Cements and Textiles to be the prime beneficiaries. In this regard, our preferred plays include MLCF, DGKC and NML.
