<B>Don't fear the intensity of opposing-wind, O' Eagle</B>
<B>It only blows to help you fly even higher. - Allama Iqbal</B>
The Pakistan Stock Exchange (PSX) witnessed a landmark year in 2016. The benchmark KSE-100 index soared up 45.7 percent, which made it the top performing index in the region. Globally, the KSE-100 took the fifth spot below turnaround stories from South America and Russia.
The year will be looked back upon, and identified as the one where maturity came into the market. Returns aside, the kind of strength and resilience that was shown by local investors throughout the year surprised analysts and commentators across the board.
The start of the year was not that encouraging for the market as the index fell sharply twice during the first three months. The multi-year low international oil prices took the oil heavy index down with it and then up again as oil prices rebounded.
The bull-run started from the second quarter, and apart from minor hiccups no news was able to tame down the beast. Panama leaks, Brexit, Trump, border tensions, political chaos - all came and went but the investors stood firm, exhibiting their belief in value and potential of this market.
KSE-100 Leaders and Laggers:
The top ten contributors to the KSE-100 index consisted of banking, E&P, cement and pharmaceutical companies. Habib Bank Limited (PSX: HBL) emerged as the leading contributor in CY16 with an addition of 930 points to the index following the re-rating of banks in the MSCI Emerging Markets Index. It was followed by Lucky Cement (PSX: LUCK), which contributed 878 points following high demand and increased capacity utilisation amidst increased infrastructure development.
The E&P and refinery sector did well in the face of recovering gross refining margins as well as inventory gains realized due to the bullish trend in oil prices during CY16. This resulted in Oil and Gas Development Company (OGDC), Pakistan Oilfields Limited (PSX: POL) and Pakistan Petroleum Limited (PSX: PPL) in posting an impressive contribution to the index.
On the other hand, laggers for the index belonged mostly to the fertilizer, textile and power sectors with Fauji Fertilizer Company and Engro Fertilisers Limited (PSX: EFERT) dragging the index down the most during CY2016. The fertilizer sector witnessed decline in off-take and overall structural issues that led to lower margins during the year. Similarly, power generation firms such as Kot Addu Power Company (PSX: KAPCO), Pakgen Power Limited (PSX: PKGP) and Lalpir Power Limited (PSX: LPL) had lower margins due to fuel mix and plant inefficiencies.
Top Performing Stocks:
The best performing stock in the KSE-100 index was International Steels (PSX: ISL). It was a dream year for the company as expansion came online; international prices turned into their favour; anti-dumping case came out positive for them; capacity utilisation went to optimum level; while the company was able to sustain historic margins.
The second best performing stock was Sui Northern Gas Pipeline (PSX: SNGP). Investors favoured this utility company as UFG declined and its asset base showed growth upon which the company was guaranteed return from the government. Institutions, especially mutual funds took liking to this stock. The prospects for SNGP look bright in 2017 as well.
Honda Atlas Cars (PSX: HCAR) outperformed in the auto sector after the company launched the new civic that saw its monthly sales double in 2016 as compared to 2015.
Oil Marketing Companies (OMCs) and refinery sector stocks also performed impressively. Gross refining margins improved during 2016, while the OMC sector witnessed volumetric growth that benefited companies like Hascol Petroleum (PSX: HASCOL) and Shell Pakistan (PSX: SHEL). Searle Pakistan (PSX: SEARL) was the pharmaceutical story of the year as the company continued its double-digit growth.
Mutual Funds Performance:
In line with market performance, mutual funds also posted positive returns in 2016. According to data compiled by the Mutual Funds Association of Pakistan (MUFAP), conventional equity funds gave an average return of 39.3 percent, and shariah compliant equity funds gave average return of 40.7 percent.
NAFA Stock Fund was the best performing fund in the conventional equity category with an outstanding return of 51.45 percent. Speaking to BR Research, the Chief Investment Officer of NAFA, Mr Sajjad Anwar discussed various reasons for their fund's out performance. According to him NAFA's top-down investment approach, qualified and experienced investment committee, regular engagement with listed companies and robust fundamental research led to their remarkable performance.
Some of the top scrips that helped NAFA Stock Fund in achieving the top spot were International Steels Limited (PSX: ISL), Indus Motors (PSX: INDU) International Industries (PSX: INIL), Attock Cement (PSX: ACPL), Nishat Mills (PSX: NML) and Kohinoor Textile Mills (PSX: KTML).
In the shariah category, the top performing fund for CY16 was JS Islamic Fund with an exception return of 54.11 percent. The fund manager, Mr AAH Soomro, highlighted that out performance of the fund was due to allocating investor's money into companies that a) are at an inflection point of turning into sustained profitability, b) have an imminent material improvement in the business environment, c) are witnessing sustained earnings growth owing to improving macro-economic variable. Top performing scrip for the fund was Cherat Cement (PSX: CHCC).
Outlook:
The outlook for the market going into 2017 remains positive. MSCI inclusion in mid-June, potential re-rating and inflow from emerging market passive and active funds, and CPEC related activity would keep the bulls interested. On the downside, potential risks include currency devaluation, which looks imminent; rise in international commodity prices, which could lead to fiscal pressure; and lastly any political mishap that could turn the tables for the market.