The bulls dominated at the Karachi Stock Exchange (KSE), as the benchmark KSE-100 index rose 2.7% WoW to close at 33,235 with trading volumes averaging 23% WoW higher at 296mn shares/day. Investors took optimism from (1) the Finance Minister’s interview in London (where he hinted at a possible discount rate cut in the upcoming Monetary Policy in May 2015), (2) Chinese President’s visit next week (where number of power and infrastructure projects agreements are expected to be signed) and (3) Moody’s highlighting HBL’s divestment as a credit positive for Pakistan’s economy. Oil refineries rallied during the outgoing week on (1) strong financial results for 3QFY15 and (2) expectations of improving GRMs. Foreigners too turned net buyers of US$7.4mn vs. their net selling of US$6.4mn in the preceding week. Other key highlights of the week were (1) Government receiving US$1.6bn offers for its US$1.02bn divestment in HBL, (2) Government review petition relating to verdict on GIDC rejected by Supreme Court, (3) Senate passing Securities Bill 2014, (4) Remittances rising by 13.3% YoY to US$1.58bn in March-2015, (5) Oil prices touching their 2015 peak and (6) World Bank projecting Pakistan’s FY15E GDP growth at 4.4%.

During the week, amongst key sectors, major buying was seen in Oil & Gas, Commercial Banks and Chemicals, up 2-6% WoW. During the outgoing week, foreigners bought shares valuing US$101.4mn and sold shares worth US$93.9mn with net buying of US$7.5mn. Local mutual funds were net buyers of US$22.1mn while local banks were net sellers of US$19.3mn. The Resource Group (TRG), J.D.W. Sugar (JDWS), Dawood Hercules Corporation (DAWH), Attock Refinery Limited (ATRL) and  Pakistan Petroleum Ltd (PPL) were major gainers during the week, whereas Pakistan Telecommunication Ltd (PTC), Nestle Pakistan (NESTLE), Attock Cement Pakistan Ltd (ACPL), Rafhan Maize Products (RMPL), and Archroma Pakistan Ltd  (ARPL) were major losers. Finance Minister, Ishaq Dar, expects the State Bank of Pakistan (SBP) to cut interest rates again in its next scheduled monetary policy meeting in early May 2015. We expect a further 50bps cut in 2015.

As per the notice sent to KSE, the board of Mari Petroleum (MPCL) has approved an increase in authorized share capital to Rs13.1bn by creation of 1.1bn preference shares. The board has also approved the payout of un-distributable profits of Rs9.7bn as specie dividend, subject to the issuance of preference shares, which translates into Rs87.7 for every ordinary share held. Soneri Bank (SNBL) and Habib Metro Bank (HMB) announced financial results for 1Q2015. SNBL reported earnings of Rs613mn (EPS Rs0.56), up by 98% QoQ and 102% YoY. HMB also reported earnings growth of 42% YoY to Rs1.4bn (EPS Rs1.35).

According to experts, although major producers like USA and China would witness reduction in their production, increase from Pakistan, Brazil and India would partially offset the fall. Despite lower cotton production, international cotton prices have dropped 22% this year, caused by 1) depressed demand from China that cut its imports by ~6mn bales and 2) high cotton ending inventories.

On the domestic front, total cotton arrivals reported by PCGA (Pakistan Cotton Ginners Association), have increased by 10.8% to 14.8mn bales (165kgs), on the back of improved yield per acre. Due to higher production and global dynamics, cotton prices have dropped by 22% in FY15TD to PKR5,520/40-Kg while yarn prices (20s) have witnessed fall of 14.4% to PKR239/Kg. Decline in yarn prices is mutually linked to lower demand and falling polyester yarn prices which is made from the derivatives of crude oil. As a result, yarn primary margins have squeezed to PKR73/kg vs. PKR87/kg at the start of the fiscal year.

It is expected margins to remain depressed, which would keep hitting spinning sector margins. However, profits may improve due to the absence of inventory losses as we do not expect another sharp fall in cotton prices.