Pakistan Stock Exchange (PSX) performed extra-ordinary well touching all time high level of 47,806.97 points on last trading days of 2016. The market has touched Rs 9.628 trillion capital.
Benchmark total return KSE-100 Index gained 46 per cent (45 per cent in US Dollar terms) in 2016 compared to last 10-year average return of 20 per cent (15 per cent in US Dollar terms) and last 20 year average return of 24 per cent (19pc in US Dollar terms).
Amongst Asian markets, Pakistan remained on top. Moreover it also remained No 1 in MSCI frontier markets. As shown in accompanied table, according to Bloomberg, Pakistan market 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,” said Mohammed Sohail, Head of Topline Securities. “Economic recovery positively affected local demand for various sectors, rebound in oil prices, better security situation and exuberance on Pakistan’s reclassification in MSCI EM Index also helped,” he added.
In line with our expectations automobiles and cement remained top performing sectors in 2016 posting market cap gains of 73 per cent and 66 per cent, respectively. Index heavy weight oil & gas exploration sector was up 52 per cent whereas banks were up 33 per cent. Fertilizer sector was down 5 per cent due to weak fertilizer demand and high inventory levels.
Amongst top 30 stocks in terms of market capitalisation, Pakistan Oil Fields (POL), The Searle Company (SEARL) and Mari Petroleum (MARI) remained top performers posting gains of 112 per cent, 106 per cent, and 98 per cent respectively in 2016.
Average volumes at the local bourse increased by 14 per cent to 281 million whereas average value was up only 2 per cent 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 per cent in 2016 to reach Rs 9 billion while open interest in single stock futures was up 100 per cent 2016 to Rs 11 billion. In spite of rising leverage the financing rate in MTS fell from 9 per cent to 8 per cent at end on 2016 and similarly average ready future spread fell to 8 per cent from 9 per cent.
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.
Mr Sohail said, “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. The government also took new taxation measures for real estate sector in 2016 which, he believes, 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, he said. This has positive implications on investors’ confidence. Resultantly, SBP-IBA consumer confidence index was up 3 per cent in 2016.
During the outgoing year, 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 per cent 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
Macro economic recovery continued in 2016: Another reason supporting this stock market rally in 2016 was improving economy. Pakistan economy grew by 4.7 per cent in 2015-16 compared to last 3-year average growth of 3.9 per cent.
Foreign exchange reserves of the country improved by 12 per cent to reach $23 billion at end of 2016 enough for 7 months of imports. Policy interest rate reached multi decade low of 5.75 per cent mainly due to lower inflation.
Pakistan successfully completed IMF programme and rating agency standard and poor’s upgraded Pakistan to B from B-.
Fiscal deficit also declined to 4.6 per cent in 2015-16 as compared to 5.3 per cent in 2014-15. And in spite of falling exports and remittances Pakistan currency remained stable against US Dollar.
Pakistan also saw rising mergers and acquisitions transactions in 2016. Dutch firm, Friesland Campina, one of the world’s largest dairy company, bought majority stake in Engro Foods for $450 million. Turkish firm Arcelik also bought Dawlance Pakistan (one of Pakistan’s 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.
Local funds bought $300 millions, non-bank firms bought $225 million: Contrary to expectations foreigners remained net sellers in 2016. They bought shares of approximately $3 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 during 2016.
The analysts attribute this selling to global fund flow to US after hopes of increased infrastructure development post presidential election and rise in US interest rates. 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 & commercial banks 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.
Positive outlook for 2017: The analyst eye index target of 56,000 in 2017 offering return of 21 per cent (inclusive of dividend yield). Pakistan market, he believes, is likely to benefit from 1- rising domestic demand, 2- CPEC led investments, and 3- increasing local liquidity.
