LAHORE - Market sustained its bullish momentum during the outgoing week ahead of the monetary policy statement on Jan 24th. The market expects State Bank of Pakistan (SBP) to cut policy rate by 50-100bps. As a result, the benchmark KSE 100-index gained 1.4% WoW to close at 33,786. Average daily volumes increased by 12% WoW to stand at 331mn shares/day, while foreigners returned as net buyers worth US$17.5mn. Auto sector was in limelight after release of better-than-expected auto sales number for December 2014, where the industry grew by 28% YoY. Other key highlights during the week were: growth in banking deposits by 10.8% YoY to Rs8.4trn in 2014, government hinting at agreement renewal with K-Electric (KEL) for supply of 650MW and National Savings attracting Rs201bn in 7MFY15 vs. target of Rs153bn.
Amongst different asset classes available to investors in Pakistan, stocks remained a standout performer in 2014. In spite of the increased political noise, the benchmark KSE-100 posted return of 27% during 2014, outperforming other asset classes by a wide margin. Improving macros and increased visibility of Pakistani market amongst foreigners led to sharp improvement. Average return from stocks during the last 10 years (2005-14) also stood at an impressive rate of 25%, followed by returns on gold that yielded 18% during the last decade. According to a survey, real estate investment in selective localities yielded 25% in 2014.
2014 remained a bearish year for commodities as both Oil and Gold, one of the highly-traded commodities, witnessed major decline. WTI oil prices dropped by a whopping 42% during 2014, due to economic slowdown and increased shale gas production by the US. The issue of declining oil prices intensified in 4Q2014 when OPEC members refused to cut oil production. As a result, WTI touched US$53/barrel as of Dec 31, 2014 as against US$93/barrel in Dec 31, 2013. On the other hand, local gold prices dropped by 5% in 2014 due to rapidly changing geopolitical and economic scenarios. Investors use Gold as a hedge against inflation, however, low inflation rates and expected hike in interest rates by US Fed in 2015 have kept prices under pressure.
Investment in US-Dollar also yielded negative return as it depreciated by 4% versus Pak-Rupee in 2014. This is in contrast to an average return of 6% during the last 10 years as Pakistan witnessed significant rise in foreign exchange reserves. Proceeds from privatization, 3G-auction and Eurobond issue resulted in higher inflows.
Stocks also outperformed fixed-income securities by a wide margin during the year. Fixed-income T-Bills yielded 10%, whereas average rate on 3-year Special Saving Certificates (SSC) stood at 12% in 2014. Return on bank saving accounts also stood at 7%, which is considerably lower than return of 27% offered by stocks.
Inflation adjusted return of KSE-100 stood at 20% as inflation during 2014 clocked in at 7%. This is in contrast to inflation-adjusted returns of 5% on SSC and 3% on T-Bills. Other investment assets posted negative real returns during the year. Inflation-adjusted return on stocks during last 10 years also stood at an impressive rate of 14%.
Investors’ favorite and actively-traded cement stocks at Karachi bourse posted a substantial return in 2014. According to analysts, cement sector market capitalization posted a gain of 70% versus benchmark, KSE-100 Index return of 27% in 2014. This is the third consecutive year that cement companies have performed better than the broader market. Someone who took exposure in cement sector 3 years ago will be richer by approximately 6.0x.
Profitability of the sector improved due to improvement in margins coupled with hike in cement prices as average net retention price (per bag) increased by 12% in 2014 from Rs367 to Rs409. Moreover, focus of Sharif’s Govt. on development projects, and start of mega projects like motorways, housing and small dams has helped cement industry to post decent growth of 9% in local sales in 1HFY15. Moreover, SBP (State Bank of Pakistan) in its last monetary policy cut discount rate by 50bps which will also help leveraged companies like FCCL and MLCF to get some relief from lower financial charges. During FY14, the sector posted profit growth of 12% to Rs43bn against Rs38bn in FY13, while in 1QFY15, the sector profits grew by 4% to Rs8.9bn versus Rs8.5bn in 1QFY14.