PSX emerges as best market in Asia with 46pc return

RECORDER REPORT

KARACHI: Pakistan Stock Exchange has emerged the best market in Asia as the benchmark KSE-100 index gained 46 percent (45 percent in USD) in the calendar year 2016 as compared to last 10 years average return of 20 percent (15 percent in USD).

PSX was not only top performing market amongst Asian markets but also it was the top performing market in MSCI Frontier Markets. PSX 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, an analyst at Topline Securities said. Economic recovery positively affected local demand for various sectors, rebound in oil prices, better security situation and exuberance on Pakistans reclassification in MSCI EM Index also helped, he added.

Automobiles and cement remained top performing sectors in 2016 posting market cap gains of 73 percent and 66 percent, respectively. Index heavyweight 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.

Amongst top 30 stocks in terms of market capitalization, Pakistan Oilfields (POL), The Searle Company (SEARL) and Mari Petroleum (MARI) remained top performers posting gains of 112 percent, 106 percent and 98 percent respectively in 2016.

Average daily volumes at the local bourse increased by 14 percent to 281 million shares whereas average value was up only 2 percent to Rs 11.6 billion ($111 million) in 2016. In the derivative market, traded value in single stock futures stood flat and remained at Rs 3.0 billion ($29 million) a day in 2016 as against Rs 3.1 billion ($30 million) in 2015.

Margin Trading System (MTS) financing rose by 86 percent in 2016 to reach Rs 9 billion. In spite of rising leverage the financing rate in MTS fell from 9 percent to 8 percent at end on 2016 and similarly average ready future spread fell to 8 percent from 9 percent.

Despite booming market, in the absence of government offerings, Pakistan witnessed just 3 initial public offerings in 2016 with amount raised of Rs 4.2 billion as against offering of Rs 116 billion seen in 2015.

Falling interest rate and maturity of high yielding government securities has been supporting the local equities. And 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.

Political noise also reduced in 2016 as opposition parties protest against Panama scandal has not been effective. Though tension with India created some uncertainty but now it has also eased.

In another landmark development, 40 percent strategic stake in Pakistan Stock Exchange was sold 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 of Pakistan capital markets.

Another reason supporting this stock market rally in 2016 was improving economy. Pakistan economy grew by 4.7 percent in FY16 compared to last 3-year average growth of 3.9 percent.

Foreign exchange reserves of the country improved by 12 percent to reach $23 billion at end of 2016 enough for 7 months of imports. Policy interest rate reached multi decade low of 5.75 percent mainly due to lower inflation.

Pakistan successfully completed IMF programme and rating agency Standard & Poors upgraded Pakistan to B from B-.

Fiscal deficit also declined to 4.6 percent in FY16 as compared to 5.3 percent in FY15. And in spite of falling exports and remittances Pakistan currency remained stable against US dollar.

Pakistan also saw rising mergers and acquisitions (M&A) transactions in 2016. Dutch firm, Friesland Campina, one of the worlds largest diary company, bought majority stake in Engro Foods for $450 million. Turkish firm Arcelik also bought Dawlance Pakistan (one of Pakistans leading appliances company) for $258 million. Banking sector also saw a major merger activity when MCB Bank, Pakistan third largest 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.

Contrary to expectations foreigners remained net sellers in 2016. They bought shares of approximately $3.0 billion and sold $3.4 billion resulting in net selling of $350 million according to NCCPL data. This is higher than 2015 net outflow of $315 million.

We attribute this selling to global fund flow to US after hopes of increased infrastructure development post presidential election and rise in US interest rates, the analyst said. Moreover few Frontier funds may have offloaded their shares ahead of Pakistan inclusion in EM in May 2017.

Most of the selling by foreigners was seen in Oil & Gas Exploration, Fertilizer and Commercial Banking sectors. However, this foreign selling was easily observed by local liquidity. Mutual fund and NBFC were net buyers of $300 million and $225 million respectively during the year. Thanks to low return on fixed income instruments and investor risk taking ability, local mutual fund sector is growing.