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Bulls charge Pakistan stock market

Khaleej Times 2019-12-02 01:13:54

The Pakistan Stock Exchange is expected to sustain its three-month rally in the coming months due to positive economic indicators, possible monetary easing and a thaw in border tensions with India.

Analysts and market experts expect the market to likely surge another 20 per cent by March - provided Pakistan exits the grey list of the Financial Action Task Force (FATF) in February.

They said bulls have returned, tightening their grip in the past three months despite a challenging political environment in the country. After touching 2019 low on August 16, the market is already up 36.6 per cent so far and is expected to cross the 40,000 barrier this week.

Dr Abdul Hafeez Sheikh, Adviser to the Prime Minister on Finance, said the "strong market rally" shows increasing investor confidence thanks to stabilisation measures taken by the government.

In a tweet on Sunday, Dr Sheikh said the KSE-100 index was up by 14.9 per cent in November, which he said was the highest one-month return since May 2013. He said the benchmark index has increased by 36.6 per cent, or 10,500 points, since August 16, reflecting a strong recovery after hitting a 2019 low.

Muhammad Farid Alam, chief executive of AKD Securities, said market momentum can be sustained on the back of an improvement in macro indicators and relatively healthy corporate results accompanied by full-year payouts.

"In this backdrop and expectations of monetary easing during the first half of financial year 2019-20, the benchmark KSE-100 Index can cross 42,500 points in the near future. The heightening of political noise can keep a lid on price outperformance while the FATF decision in February will serve as a key check point," Alam told Khaleej Times on Sunday.

"The FATF decision to keep Pakistan on its grey list until next February would water down threats of blacklisting in the immediate term. The government is scrambling to become compliant with the FATF's action plan in this regard," he added.

The KSE-100 Index closed at 39,288 points on Friday. The rise was witnessed due to easing concerns on the macroeconomic front such as a surplus current account balance after 49 months, a stable exchange rate, over $1 billion inflows in government treasury bills and higher forex reserves at $15.58 billion as at November 22.

Samiullah Tariq, director of research at Arif Habib Limited, said the market is up by more than 36 per cent since touching a low of 28,765 points on August 16 due to positive economic numbers.

Elaborating, he said the rupee strengthened by over 5 per cent against the US dollar thanks to a remarkable improvement in balance of payments, a 74 per cent plunge in the current account deficit during the July-October period and a 239 per cent year-on-year growth in foreign direct investment.

"In addition, foreign exchange reserves are up by $1.1 billion and foreign investment in government treasury bills hit $1.16 billion during the first five months of current financial year 2019-20. These numbers show confidence in Pakistan's economy and are the major reasons for the market rally," Tariq told Khaleej Times on Sunday.

Muzzammil Aslam, managing director of Next Capital, echoed similar views and said a reversal in current account deficit, a successful IMF review of the economy, an easing of domestic political uncertainty and a strong political will to address structural flows such as circular debt and privatisation of state-owned enterprises, among others, are some of the key reasons behind the rally.

"The market is already up more than 36 per cent from its low in August. Now all eyes are on the FATF review next year and monetary easing, and if this materialises the market may rally another 20 per cent by March," Aslam told Khaleej Times.

To a question, he said sectors impacted by higher interest rates and slow demand should be traded cautiously. However, the energy chain and banks should be key sectors to keep an eye on for investment.

Tariq said banks should do well in the future, along with exploration and production the and power sector. "Banks are enjoying higher interest rates and it reflects in their profitability with 46 per cent year-on-year growth in the first three quarters in 2019," he said.

"Cyclical sectors like steel and cement are risky and investors should avoid them as their stock prices do not correspond with the fundamentals," Tariq said.

In November, foreign investors bought $7.4 million worth of shares dominated by the fertiliser sector ($16.1 million), banking ($13.4 million) and OGMCs ($5.3 million), while net selling of $12.7 million and $3.7 million was witnessed in cement and textile sectors, respectively. Average volumes during the month settled at 304.5 million shares, up 60.4 per cent, the highest average volume since May 2017, while the average traded value clocked in at $66.5 million, up 75.3 per cent, highest since November 2018.

"We prefer sectors like banks [attractive on valuations], power [earnings growth for selected players and dividend yield] and sectors that have US dollar-linked revenues such as oil and gas [exploration], textiles and technology. Cyclicals [such as cement] should be avoided until visible improvement in aggregate demand materialises in the underlying economy," Alam said.

He said a visible improvement in forex reserves - up 11 per cent since July 2019 - on the back of foreign inflows and reduction in forward liabilities of the central bank. Additionally, tax incentives to non-resident firms to invest in government securities has led to portfolio inflows in excess of $1 billion in government securities.

"In our opinion, these factors have overpowered any political noise emanating from the opposition parties. The improved civil-military relationship has also played its part, with the investor community disregarding the domestic political noise," Alam said.

- muzaffarrizvi@khaleejtimes.com