Lahore -  Equity prices continued to trend upwards despite spree of foreign selling at the bourse with benchmark KSE-100 Index closing the week at 43,000pts level (up 1.6% WoW). Foreigners remained net sellers of US$37mn worth of equities mainly due to flight of capital towards developed markets from Frontier and Emerging economies amidst strengthening of the US Dollar. Locals (particularly mutual funds and banks) on the other hand, continued to absorb most of this selling pressure, with major buying interest tilted towards value stocks which fell prey to unabated foreign selling. As a result, across the board activity was observed with key index heavyweights such as (1) E&Ps (+2.6% WoW), (2) Cements (+3.0% WoW), (3) OMCs (+0.8% WoW) and (4) Foods (+1.8% WoW) outperformed during the week. Key underperformers included (1) Banks (-2.4% WoW) and (2) Fertilizers (+0.2% WoW). Overall participation also recorded improvement, gauged from uptick in average trade volumes (+3.6% WoW to 475mn shares/day) and average traded value (+9.6% WoW to US$147mn/day).

“One thing that we are repeatedly noticing, while meeting local & foreign investors, is that 2017 is set to come with big liquidity inflows in PSX. Not only the country would reclaim its spot in the MSCI EM club, where historically all the foreign inflow estimates have proven to be underestimates, we see even larger pool of liquidity heading towards the stocks from the local front.”

Experts estimate a total of $1.0-1.5b fresh liquidity approaching stock market in 2017. Their thesis is based upon estimated i) US$300-500m flows linked to MSCI EM funds, ii) US$140-220m liquidity inflow to brokers after PSX divestment, iii) net inflow of PKR540b (US$5b) to banks after PIBs maturity being invested in T-bills or stocks, iv) new funds flows to mutual funds that have received over PKR40b (US$380m) in last 6 months, v) booming insurance business specially life insurance, and vi) likely amnesty to real estate which could bring HNWIs towards documented sectors including stock market.

With positive news flows all around (economy and corporate profitability) and large funds inflow, market price multiples re-rating towards its justified levels would be inevitable, which would also provide a conducive environment for IPOs. Experts see smooth sailing to our Jun 2017 estimation of KSE100 trading between 45-50k levels. We also see dust settling down on the political front though tough economic variables (pressures on PKR) may have their impact on the market. At present, KSE100 is trading at forward P/E of 9.8x, at more than 20% discount to average MSCI EM index price multiple. 

Experts said that the benchmark KSE-100 index posted a buoyant trend in the outgoing week, as local bourse touched new heights on the back of strong liquidity position of local investors. Volatility in the international crude oil prices fueled by prospective production cut proposals to be discussed by the Organization of Petroleum Exporting Companies (OPEC) in its upcoming meeting led interest in the oil stocks as investors went on to take fresh bets in the sector. Moreover, positive sentiment in the cement sector further supported index later in the week. Resultantly, the KSE-100 index gained 675 points or 1.6% over the week to close at all time high of 43,000 index levels.

?  Average daily volumes for the outgoing week posted a increase of 4% WoW to 475mn shares while average daily value increased 10% WoW to Rs15bn/US$147mn over the week.

?  Top three gainers over the outgoing week were Cements, Oil and Gas Exploration Companies and Food and Personal Care, up 4.7%, 3.7% and 3.5%, respectively. While top three losers were Automobile Assemblers, Banks and Technology and Communication declining 1.1%, 0.9% and 0.6% respectively. 

?  Foreigners remained net sellers of US$37mn during the week. Top three sellers remained Banks, Chemicals and Cement with US$12mn, US$3mn and US$2.5mn selling, respectively.

 Sales of textile sector remained flat (up 1% YoY) while profitability of our sample textile companies trading on Pakistan Stock Exchange grew 4.4% YoY to Rs4.3bn in 1QFY17. Uptick in profitability can be attributed to substantial non-operating income and further reduction in finance cost of select textile manufacturers.