LAHORE - The local equities have receded 17 percent in 2017 with 4 trading sessions left versus gain of 46 percent in 2016. Political, economic and regulatory pressures turned Asia’s best performing market of 2016 to 2017’s worst performing market despite ample domestic liquidity, experts said.

Mutual funds ($203m), insurance companies ($182m), and companies ($128m) absorbed foreign selling of $497m (versus $339m in 2016). Foreigners have been net sellers for 3 years in a row, with cumulative outflow since 2015 reaching $1.15 billion. Pakistan’s benchmark KSE-100 has been left in the dust compared to the regional peers with MSCI Frontier Markets, Emerging Markets and Emerging Markets Asia indices gaining 28 percent, 32 percent, and 38 percent, respectively in 2017.

For annual sector review, a report of the Topline Securities analyzed returns of top 15 sectors (out of 35 total) at PSX in terms of market capitalization. These sectors have aggregate market capitalization of around Rs7.4tr ($66 billion) and make up around 90 percent of total market capitalization. Amongst these, tobacco (3 listed companies with 8 percent weight) remained the top performer with its market cap gaining 33 percent as govt in FY18 budget increased taxation slabs (based on cigarette packet prices) from 2 to 3, which lowered taxes on cheapest cigarettes (which are the best sellers). On the other hand, cement sector’s (21 listed co’s with 5 percent weight) market value was sliced in half (-49 percent) as investors priced in a supply glut and price wars given all the announced expansions.

Amongst the top sectors of 2016 with 101 percent return, steel (engineering) emerged as second best performer in 2017 with its capitalization growing 10 percent. Experts highlight that out of the 19 engineering companies listed at PSX, 9 of them are steel manufacturers which are actively traded at the PSX, whereas most of the other engineering companies are defunct or illiquid.

Oil & gas exploration sector (E&Ps) comprising of 4 listed cos with 15 percent weight in KSE-100 index returned 2 percent in 2017 (vs 52 percent in 2016). Heavyweight E&Ps outperformed the broader market on the back of rising crude oil prices (Arablight +16 percent YTD) and higher volumetric production.

Banking, the second most valuable sector at the bourse (but highest weight in KSE-100 index due to float criteria), saw its value shrink by 23 percent in 2017 vs 33 percent gain in 2016. Besides the huge penalty on Habib Bank (HBL) and pension liabilities on National Bank (NBP), the sectors earnings remained flat-to-declining in 2017 hence the underperformance. “If we exclude HBL & NBP’s capitalization the sector was down 16 percent, broadly in line with the market.”

Despite being considered a safe bet (dollar hedge & high yielding dividends), power has seen its value erode by 27 percent (ex KEL) in 2017 versus 10 percent return in 2016. The sector has been plagued with overdue receivables which have hampered few listed IPP’s ability to pay dividends. While more recently, govt’s push to eliminate furnace oil in lieu of cheaper fuels has raised concerns on future profitability as most of IPP’s are furnace oil based.

Similarly, refineries which supply furnace oil to power plants have also come under pressure. Refineries have shed 32 percent (ex BYCO) in 2017 versus 65 percent return in 2016. Though refineries incurred major capex during 2016-17 to produce Euro-II grade low sulfur diesel, recently their output has been curtailed as the govt abruptly shuttered furnace oil based power generation. This led to serious problems, where storage tanks were filled to the brim with furnace oil as power plants had ceased operations.