Equity market gains 3.7pc on breakthrough in Pak-US impasse

Breakthrough in Pak-Pak deadlock, better-than-expected inflation numbers, robust cement dispatches and higher international oil prices provided the impetus to the local bourses during the last week. Consequently, the KSE 100-index gained 509 points (up 3.7 per cent WoW) to close at 14,310 level while average volumes surged by 33 per cent WoW to 92 million shares. Moreover, foreigners were net buyers of $9.4 million during the week.

Furqan Ayub, a stock market expert, observed that the US Secretary of State Hillary Clinton issued a statement which was accepted as an apology by Pakistan for the Salala tragedy. Consequently, the Defense Committee of the Cabinet reopened the NATO supply routes. This understanding between the two countries is also expected to lead to the release of the Coalition Support Fund (CSF) funds.

According to Pakistan Bureau of Statistics (PBS), Consumer Price Index (CPI) clocked in at 11.3 per cent for the month of June-12 as against 12.3 per cent last month. The cumulative CPI figure for FY12 stood at 11 per cent versus the projected target of 11-12 per cent.

All Pakistan Cement Manufacturer Association (APCMA) reported cement volumetric sales for June-12. Cement volumes in June-12 stood at 3.03 million tons, rising by 10 per cent YoY and 5 per cent MoM. For FY12 cement sales have posted a growth of 4 per cent YoY to 32.5 million tons.

Higher than expected cement numbers in June-12 triggered a rally in DGKC, as the stock outperformed the market by 4.8 per cent. The rise in international oil prices also stirred interest in the E&P sector leading to an outperformance of OGDC and POL by 2.0 per cent and 0.3 per cent, respectively.

Mohammad Rizwan, a capital market expert, observed that on the back of ease in tensions between US-Pak relationship and resumption of NATO supplies, the market increased by 508 points during the outgoing week. Moreover, rebound in the international market and foreign inflow of $9.3 million (2nd July, 2012 to 5th July, 2012) during the week also contributed to this upsurge in the market.

Experts said that local bourses have generated a gain of 10 per cent, based on benchmark KSE 100-index in the outgoing fiscal year ending June 2012. And after adjusting for Pak Rupee decline, the gain in US$ was only 1 per cent. This is unimpressive performance in spite of serious efforts made by the apex regular to resolve the gain tax issue that was affecting the flows to the market. This return is not at all remarkable compared to last 10-year average yearly return of 28 per cent (US$ 25 per cent) posted by Pakistan market. Moreover, with benchmark T-Bill yield 12.3 per cent on an average in FY12, the performance of equities was lower than expectation.

Once famous for its depth, Pakistan market volume has been suffering ever since the imposition of infamous price cap rule in 2008. Last year average daily volumes slightly improved to reach 128 million shares compared to 95 million shares. However, in value terms there was hardly any improvement as average daily value traded was Rs4 billion or US$44 million compared to Rs3.8 billion or US$44 million in FY11. This again compares unfavorably with last 10-year average daily volume of 220 million shares (Rs16 billion or US$230 million). Economic slowdown, higher interest rate and absence of user friendly derivatives product remained key reason of low activity at local bourse. Though volumes improved since the announcement of changes in gain tax by the Finance Minister, the overall market depth remained affected. As a result, only 4 IPOs came to the market worth Rs2.4 billion in FY12

Despite depressing volumes, decent flows were witnessed in FY12 from offshore clients. Foreigners bought shares worth US$730 million and sold US$920 million according to clearing company data. This net selling of US$190 million also included Hubco block sale of US$129 million by two of its foreign sponsors, Xenel and International Power. However, the second half from Jan 2012 onwards have seen some improvement as foreigners net buying has been US$39 million (excluding Hubco deal) in last six months and has helped the benchmark KSE 100 Index to post a gain of 22 per cent (USD16 per cent) since beginning of Jan 2012.

In the regional context, however, the performance of Karachi bourse was better as other markets have been affected by Euro zone crisis. Amongst 4 Asian Frontier markets as defined by MSCI, Pakistan remained the best performing market in last 12 months. Moreover, amongst 12 countries in Asian Emerging and Frontier markets, Pakistan is 4th best performing market in FY12.