LAHORE - Despite the negative start to the week, where the KSE-100 Index lost 374 points in the first trading session of the week, the market recovered well to close at the 27,116 level (+1.3%WoW). However, investor participation remained on the lower side, evident from the fact that average daily volumes dropped by 18%WoW to 154mn shares. Positive news continued on the external account front during the week where (1) IMF released the third tranche of US$556mn under the ongoing US$6.8bn support program, (2) World Bank has agreed to provide US$1.7bn that also includes US$700mn for the construction of Dasu Hydro Power project, and (3) the Finance Minister is scheduled to leave Pakistan on April 1, 2014 for road shows in Dubai, London and New York. Also during the week, (1) banking stocks remained in the limelight as the govt. mopped up Rs530bn in the PIB auction against a target of merely Rs60bn, and (2) National Fertilizer Development Centre (NFDC) released fertilizer offtake figures for February 2014, where urea offtake clocked in at 378k tons (-10%YoY, -39%MoM).

Experts said that mmarket gained 1% to close at 27,116 in a volatile week with 10% decreasing average volumes of Rs7.5b. In future roll over week, major news remained, Govt raising record Rs.530bn amount in PIB auction, approval of IMF tranche of around US$550mn and expectations of further currency appreciation with increasing country foreign reserves, PPL’s discovery in Naushahro Feroz block, and Government’s decision of maintaining gas prices. Banking stocks rallied following PIB auction anticipating better earnings, followed by cement sector as investors are optimistic about better cement sales for March quarter. Going forward, CPI announcement, budget related news flows and local currency movement will be eyed.

According to experts, the two most favorite foreigners’ stocks are under pressure at local bourse since last few days. Pakistan benchmark index came down by 757 points (2.8%) led by OGDC which is down 6% and MCB down 7%. These 2 stocks contributed 366 points that is approx 50% of the fall in index. Currently, OGDC has a weight of 11.5% and MCB 7.7% in KSE-100 Index compared to 21.1% and 4.7% previously when this index was not free-float adjusted. Thus, the index fall would have been higher if old index methodology was in place.

In the last 2 calendar years, foreigners bought shares worth US$2.9bn and sold US$2.4bn, resulting in net buying of US$525mn at local exchange. This year to-date foreigners are net buyers of US$23mn in spite of US$14mn net selling in the last 6 trading sessions. Thus, some profit-taking makes sense looking at continuous inflows. It is now clear that a small fund of a big foreign investor, valuing US$10-13mn, has been liquidated and not the larger fund worth US$11.7bn (as of Feb 28, 2014) in which US$827mn is OGDC (7.1% of the total fund size) and US$139mn MCB (1.2% of the total fund size) are there.

According to estimates, total foreign holding in Pakistan stands at US$4.6bn (as of Feb 28, 2014), of which these two stocks make around 50%. Our estimates suggest foreign holding in OGDC at US$1.4bn and in MCB at US$1b.

Besides liquidation of a small fund of a big investor, Pak-Rupee appreciation could be a reason but that is not a worrying factor as local investors are now selling currency and investing in stocks and property. The upcoming OGDC offering of up to 10% could be another reason. But again, experts believe it is too early to comment on its implication. Privatization Commission (PC) has invited Expression of Interest (EOIs) of more than 8 firms for appointing financial advisers and/or lead managers. This is a long process considering the transparency issue in which first phase will be short-listing of advisor and then its appointment. After that, advisor will suggest the plan as to when and how to offer considering that there is a long list of offering and limited investors. Thus, we do not think any OGDC sale is likely in this calendar year.