An exclusive year-end review by Arif Habib Limited
PSX leapt to record levels over 46,000; returning a commendable 41.3% in CY16TD (USD-based return of 41.2%). The index displayed a stunning run with several market tailwinds coming into play; i) Jun’16 MSCI reclassification announcement buoyed market sentiment even though Pakistan will officially graduate to the Emerging Markets category in June’17, ii) ongoing divestment of PSX expected to add liquidity to the market, iii) bottom-up approach intact with earnings accretion, iv) steady economic fundamentals including record low interest rates at 6.25%, low inflationary pressure at 3.8% YoY in Nov’16 compared with 4.1% YoY in Jun’16, improving law & order and a stable corporate environment.
Remarkably, Pakistan dethroned China to reign supreme as Asia’s best performing market in CY16; a first for the benchmark. Pakistan’s 37.3% return remains distinctively above the Asia-Pacific average of 5.2% and a lot higher than Thailand at 19.7% and Indonesia at 19.6% who scored just below Pakistan. In comparison, it remained a tough year for China with a negative return of 12% and Sri Lanka also recorded negative return of 11.1%.
PSX also exceeded all MSCI Developed, Emerging and Frontier markets barring Russia (66.6%), Brazil (62.9%) and Venezuela (57.8%); ranking as the forth-best performing market in the world in 2016 amongst the countries tracked by MSCI. Average returns remained much lower than Pakistan; Developed (5.4% return), Emerging (10.7%) and Frontier (-2.7%). Pertinently, Pakistan last achieved the third rank in 2014 after which it dropped to spot 23 before recovering to its current position.
Trading volumes peaked at 903.2mn shares in Sept’16 (where similar levels of volumes were last seen back in Mar’05). Particularly noticeable was the fact that the year started with slow pace and gradually gained momentum with volumes averaging 278.9mn shares vs. 247.4mn shares in 2015.
Top volumetric positions were secured by banks, technology & communication, power, cements and oil marketing companies, drawing on average 35.7, 29.8, 27.1, 23.7 and 14.8mn shares, respectively; making up to 45% of the cumulative market activity during the year. KEL took the top position as volume leader (16.3mn shares), retaining its title from 2015, and the scrips that followed were sideboard items like BOP (14.3mn), TRG (12.9mn), DCL (9.1mn) and PACE (8.mn).Average daily traded value increased to USD 136.0mn vis-a-vis USD 126.6mn in CY15, exhibiting a 7.4% YoY increase as scrips in the limelight were from the second & third tiers.
Prompted by economic development, the engineering sector generated a stunning return of 262.9% aided particularly by steel scrips including ISL. Meanwhile index-heavy banks (24.2% weight) and E&Ps (10.1% weight) returned a robust 32.4% and 41.1% respectively whereby local investors played a key role to unlock value; favorites amongst the sector remained BOP and POL. Other note-worthy performances were displayed by relatively smaller sectors: sugar (0.5% weight), automobiles (0.5% weight) and glass (0.2% weight) gave a return of 90.4%, 93.8% and 83.2%, respectively. Meanwhile fertilizers, another heavy-weight (14.5% weight) recorded a nominal increase of 3.3%, majorly underperforming the market because of excess inventory. Finally, infrequently traded leasing companies, contracted by 13.9% YoY.
The highest index contributors remained banks (2,650pts), cements (1,961pts), E&Ps (1,710pts) and OMCs (770pts) while the laggards were leasing (6pts) and modarabas (4pts). Companies leading the contribution charts include LUCK (910pts), UBL (787pts), FML (721pts), and HBL (714pts); on the flipside, FEROZ (68pts) and FFC (51pts) marked down the index.
Local investors swept the benchmark index to highs as international investors remained net sellers during CY16; net sell-off during CY16: USD 229mn vs. CY15: USD 315mn. Vulnerability to startling global events in the second half of the year eroded positive flows the market had attracted in prior months. Portfolio divestment by overseas stockholders was particularly aggravated due to the political shift in Europe amid the Brexit referendum and Trump’s surge to victory in the US presidential election; foreigners have sold USD 159mn worth of shares at the PSX since FY17TD.
Foreign selling was particularly evident in i) fertilizers (USD 89mn) given apprehensions over surplus urea inventory, ii) E&Ps (USD 85mn) amid volatility in global oil prices, iii) banks (USD 56mn) as the benchmark interest rate was cut in May’16 rate along with the imposition of super tax under the FY17 budget and the maturity of Pakistan investment bonds. Other sectors that remained ill-favored were food (USD 21mn), textiles (USD 16mn) and power (USD 11mn).
By another measure, value traded by foreigners as a percentage of total traded value increased to 19% from 18% in 2015. Moreover, despite incessant selling at the bourse, the outstanding position of overseas stockholders increased to USD 6.7bn from USD 6.6bn in 2015 as market capitalization exceeded the USD 23bn mark for the first time compared with USD 19bn in 2015. International investment comprised 28% of the total free float cap. Compared with 34% in 2015.