Past the 40,000 mark!
This column has now completed a hat-trick, forecasting the market movements correctly for three weeks running
There were multiple reasons which forced the crude prices to bounce back after falling below the $40 mark. While market forces continue to find a stable equilibrium based on demand and supply, Saudi Arabia hinting at possibilities of production caps was the major news that drove the oil market
August 12, 2016 will be penned down as historical in the record books of the Pakistan Stock Exchange as the benchmark KSE-100 index soared past the long-awaited 40,000 points barrier for the first time, primarily supported by index heavyweights PPL, OGDC and MCB. The index, for the most part of the session, traded above the 40,000 mark before succumbing to selling pressure towards the closing hours to end at 39,907 points, up 1.3pc week-on-week. Volumes also picked up 14.5pc WoW, averaging 134mn per session this week as compared to previous week’s average volume of 117m.
The market had consolidated well above the 39,000 level and the impetus provided by the oil sector on the back of increase in crude prices internationally was enough to push it past the psychological barrier – opening the route for 42,000 points initially and then 48,000 points on the benchmark index.
This column has now completed a hat-trick, forecasting the market movements correctly for three weeks running. The column highlighted last week that a closing above 39,800 would take the index past the 40,000 level.
Moving forward, the market is expected to face resistance between 40,050 and 40,200 points, whereas there is a strong support defined between the 39,300 – 39,500 levels. A closing level above 40,000 will be imperative for the bulls to continue their domination.
This week, we discussed the market forecast with Mr Ehtesham A. Khan, CMT who is currently Head of Capital Markets Group at Pak-Brunei Investment Company Ltd. He keeps a keen eye on the international markets and is a pundit of technical charts with over a decade of hands on experience at the bourse.
Q: What is your take on the market movement this past week?
EK: The market had consolidated well above the 39,300 mark and the gains in oil were the key to the market reaching a pinnacle this week. Although the week started on a dull note, the direction remained positive and momentum picked up as soon as the benchmark index closed above 39,800 points – a mark which had shown tough resistance.
With the oil and cement sectors expected to continue on an uptrend, the banking sector will be the probable beneficiary, benefiting from the derived demand it gets from these sectors of the economy
Q: What was the reason for crude prices bouncing back this week?
EK: There were multiple reasons which forced the crude prices to bounce back after falling below the $40 mark. While market forces continue to find a stable equilibrium based on demand and supply, Saudi Arabia hinting at possibilities of production caps was the major news that drove the oil market. It should be remembered that OPEC members failed to reach an agreement on placing production limits earlier this year. However, they are set to meet again in September on the sidelines of an energy conference in Algeria.
Q: How do you perceive the oil sector to perform in our local markets?
EK: Oil stocks nosedived following the fall in international crude prices. The sector has undergone a major correction and is now set to drive the index forward to new highs. OGDC and POL are likely to be the center of attention, especially for being favorites of foreigners. The emerging market status is set to pull investment and this sector has always been the favoured one. Other than this reason, the economy is on the rise, evident from the GDP numbers and a reverse in trend of inflation. Although only slightly, industrial demand has increased for petroleum products and this is also likely to have a positive impact on the top-line of Oil companies.
Q: Which other sector(s), in your opinion, will likely drive the market moving forward?
EK: Cement sector has been my long bet and I will continue with my bullish sentiment on this sector based on a few fundamental analyses. Foremost is the increase in local demand due to China-Pakistan Economic Corridor (CPEC). This project will inculcate a manifold increase in the local demand following the industries that will be an offshoot of this development. Secondly, the demand in private sector has also increased and a booming real estate business promises an increase in consumption of cement locally.
I believe that the consistent fall in exports of cement have been offset by this demand, stabilising the bottom line of cement manufacturing companies. This sector, led by DGKC and MLCF, steered the benchmark index from 36,000 points to 40,000 points and I foresee a major contribution by these stocks in the move to 48,000 index points.
With the oil and cement sectors expected to continue on an uptrend, the banking sector will be the probable beneficiary, benefiting from the derived demand it gets from these sectors of the economy.
Q: Last two months were sluggish for cement manufacturers. How do you interpret this?
EK: This drop is witnessed every year and is owed largely to the monsoon season. Also, business activity slows down due to Ramazan. Now that Ramazan is over and monsoon season is on the verge of ending, you will see numbers increasing month-on-month.
Q: Coal prices have started to increase internationally. This will increase the cost of production for cement manufacturers. Don’t you predict a fall in earnings of this sector?
EK: You are right. This will definitely adversely impact the gross margins but I foresee a rise in sales to counter increases in costs. The earnings will largely remain stable.
Q: What is the downside for the market from this level? What is your outlook over the next 6 to 12 months?
EK: I see a very limited downside for the market from this level and will suggest participants to remain long on the market. There is a major support between 38,400 – 38,800 levels and correcting to those levels will provide a breathing space to the market for a further upside move. Moreover, we have witnessed volumes being dried up at these levels and I relate it to the absence of sellers.
A fitting example is the correction that the market underwent following BREXIT. Participants that managed to accumulate positions during that are now enjoying healthy gains in their portfolios.
Also, the capital flows in the market project an interesting analysis. The first four months of 2016 saw a net outflow from the market. However, subsequent to the up gradation of the PSX to the status of an emerging market, there has been a net inflow and I expect this trend to continue for at least the next 12 to 18 months.
Our market has experienced an average growth of 20pc per annum. Applying this same factor, 12 months down the road, market is expected to be oscillating in the range of 48,000 – 50,000 points.
