LAHORE - The new year continued to prove itself lucrative at the Karachi Stock Exchange this week, where the KSE-100 Index notched up a 1.7% WoW return (+442 points) to close at the 26,488 level. Resultantly, YTD 2014 the KSE-100 is up a respectable 4.9%. Trading volumes also headed north this week, rising by 17% WoW to average 319mn shares. The market took its cue from (1) IMF lifting its FY14E GDP growth outlook for Pakistan to 2.8% (up 0.3% from initial outlook); (2) a steady influx of news on the privatization front (PIA, ODGC, PPL, HBL, UBL and ABL stake sales approved); and (3) positive corporate new sflow, where urea prices were hiked in response to gas cess hike and cement producers also hinted at price hikes. Softer-than-eyed December 2013 inflation (at 9.2%) seems to have quelled market concerns on a January 2014 interest rate hike which is, in our view, boosting market returns though we maintain our view of a 50bp hike in the policy rate in the upcoming January 2014 decision.

Investor sentiments remained positive during the week as market gained 2% with increasing volume of Rs.10.3bn up by 21% on WoW. Expectations of good dividends from Fauji group companies like FFC, FFBL and FCCL kept interest high in these scrips. Interest was seen in Engro as well, however, with slight negative outcome in ECC meeting, scrip saw some selling but it later recovered. Moreover, rumors regarding further investment in Pakistani textile sector by Chinese investors kept textile sectors high on investors’ radar during the week. Besides LPCL, cement sector remained under pressure during the week as investors decided to book profits.

In the last one week experts have seen increased speculative interest in Lafarge Cement (LPCL) as average daily traded volumes rose to 11.5m shares against average 5.5m shares traded in last month and 4.5m shares in last 3 months. This increase in volume is due to rumors regarding sell off of LPCL by Lafarge International. Though the deal has been on the table for past 3 years but nothing has materialized so far.

Pakistan market remained amongst one of the best performing frontier markets (FM) in last two years. Out of 26 frontier markets (FM) as defined MSCI (Morgan Stanley Capital International), Pakistan ranked at 7th position in the outgoing year 2013 with MSCI Pakistan gaining 38%, outpacing MSCI-FM growth by 17%. This robust performance of Pakistan equities has raised many questions and now investors want to know where Pakistan stands against FM on valuations.

Pakistan over the past 5 years has traded at a discount of 32% to FM, which now has shrunk to 20%. Despite this, Pakistan remains one of the cheapest markets amongst its MSCI-FM comparable peers from Africa, Asia and Middle East as evident from the accompanied table. Currently trading at 2014E PE of 7.9x, Pakistan stands at 25% discount to Vietnam, the 2nd cheapest MSCI-FM market with 2014E PE of 10.6x. On the other hand, Pakistan trades at a discount of more than 50% against its most expensive FM peer like Kuwait, trading at 2014E PE of 16.9x. Thus, it is safe to say that Pakistan still remains as one of the cheapest markets in MSCI-FM on the basis of PE and is therefore likely to attract interest from fund managers wanting to take exposure in markets that are resilient and not directly affected due to global factors.  

In 2013, Pakistan equities attracted about 11% of total net inflow of US$3.7bn (as of Dec 5, 2013) seen in FM, according to EPFR. During the year, foreign fund managers bought US$2.0bn and sold US$1.6bn worth of equities, which resulted in net inflow of US$398mn vs. US$125mn in the previous year. As per the latest figures, foreign fund managers currently hold equities amounting to US$4.4bn in Pakistan, which makes up 36% of the free float (8% of total market cap). Current foreign holding is also highest since 2008, when it was at US$5.1bn.

For the second consecutive year, Pakistan has been one of the best performing markets in the world as it posted a gain of 49% (US$-based 37%) in 2013. According to Bloomberg, Pakistan ranked amongst top 10 markets in the world as shown in the accompanied table. First democratic regime change in Pakistan’s history, coupled with foreign inflows, created positive sentiments in the market. Pakistan 2013 return of 49% compares favorably with last 10-years and 20-years average annual return of 28% and 22%, respectively.