By: Din Capital (Pvt) Limited
Pakistan Market: After sharp rise in July and August (peak of 36471 on August 6), September saw Pakistani market reversing its trend by losing 7% in the month with 1Q loss of 6.1%. Majority of world equity markets have been in jitters since July following sharp reversal in the Chinese market which has fallen by 40% since its June peak. The frenzy rise of 40% in Shanghai Composite index in previous four months (from Feb to June) was eroded in just two months (July and August). While international markets were mostly moving down in the start of 1Q, Pakistani market rallied strongly amid optimism from positive impact of Pak China economic corridor but failed to sustain those relatively stretched valuations. Like many emerging and frontiers markets where foreign investors were net sellers, Pakistani market too saw an outflow of $103 million.
During the current calendar year Pakistani market is up just 0.5%. Before this September fall, KSE took a correction of 18% during February and March (low of 28648 on March 30), which was followed by a spectacular rise of 27% (high of 36471 on August 6). This year also saw the central bank moving aggressively by cutting the policy rate by 350bps to 6% which is overall positive for borrowers and has improved prospects for many sectors, yet we are not seeing any gains in equity indices (KSE100 up 0.5% in 9 months). The drag on index has been the two leading sectors banks and oil/gas which constitute almost 40% of the KSE-100 index market capitalization. Textiles, which has the largest number of listed companies on the exchange, but relatively smaller weight in terms of capitalization has witnessed significant underperformance so far during the year. Major appreciation in prices was seen in autos, cement, pharma, food, power generation, software, appliances and fertilizer stocks. While the gains and losses in various sectors can be explained by factors which have gone in favor and against them, the real question is what to do next? Do we need to stay away from the sectors which have underperformed in the past like oil, banks and textiles and keep running after the winners of the recent past? Here is our review and outlook for some of the key sectors of KSE:
Investment in oil exploration stocks may continue to disappoint The performance of oil exploration stocks is directly driven by international oil prices, and therefore making allocation in these stocks will be driven by our outlook for oil prices. In September, we have seen almost all leading oil stocks in Pakistan making fresh lows despite oil prices making some recovery and staying on average 15% above its August lows. There are calls from leading investment houses that oil price prices could go down substantially lower from current levels, and may remain weak in coming months and few years due to supply glut and global economic slowdown. This lower international oil price outlook is the key factor in not making anyone comfortable buying and staying invested in oil exploration stocks. At the same time, as volatility in international oil prices to stay high, punters will be tempted to play this volatility in local oil sector stocks. As a result, we should see oil stocks generating higher trading volumes amid high volatility in coming months.