Fired up by improving economy,stocks seen skyrocketing in 2017

KARACHI: Pakistani capital market, which struck it super rich in the outgoing year, is in for a stellar run in the year 2017 too, fueled by a turnaround in companies’ earnings growth, stabilizing oil prices, a steadily improving economy, and a firm job market.

“Pakistan Stock Exchange’s (PSX) KSE-100 Index recorded an impressive return of 45.7 percent, 45.6 percent in USD terms in 2016, compared to 2.1 percent and -2.0 percent in USD terms in 2015,” Khurram Schehzad at JS Global Capital said.

The benchmark index ended year 2016 at 47,806.97 points as compared to the closing of 32,816.31 points at the end of 2015, while average volumes swelled by 14 percent to reach 281 million shares a day in 2016.

“Strong performance of Pakistan equities in 2016 was mainly led by strong local cash liquidity thanks to falling interest rate and rising investor confidence. Economic recovery positively affected local demand for various sectors, rebound in oil prices, better security situation and exuberance on Pakistan’s reclassification in MSCI EM Index also helped,” Fahad Qasim at Topline Securities said analyzing the performance of PSX.

“Automobiles and cement remained top performing sectors in 2016 posting market cap gains of 73 percent and 66 percent, respectively. Index heavy weight oil & gas exploration sector (E&Ps) was up 52 percent whereas banks were up 33 percent. Fertilizer sector was down 5.0 percent due to weak fertilizer demand and high inventory levels.” With more liquidity expected to hit the market in 2017, Pakistani equities are expected to continue re-rating.

According to Mohammad Sohail, CEO Topline Securities, Pakistan’s market is expected to continue stay the course in 2017 on the back of tangible gains from China-Pakistan Economic Corridor (CPEC) projects and rising domestic demand leading to higher economic growth prospects.

“This coupled with liquidity (with local investors) are likely to set the stage for further gains in 2017,” said he. The market capitalization, presently hovering around $90 billion, is expected to cross $100 billion mark in the upcoming year.

Analysts expect benchmark index to rise to 56,000 points by December 2017 generating 20-25 percent returns.

On the other hand, the companies’ profit is expected to hike by an average 20 percent in 2017, compared to an increase of 1.0 percent in 2016, due to a rebound in prices, higher production and sales of oil; bottoming out of interest rates, fertilizer, autos and increased investment in energy sector.

Muzammil Aslam of Invest & Finance Securities (IFSL), says Pakistan Stocks Exchange (PSX) is set to outweigh peers, as well as other asset classes. “In short, reclassification to the Emerging Market index is the X-factor for PSX, since the market still trades at a swift discount of 11 percent to the MSCI FM Index and 23 percent to MSCI EM Index, hefty foreign inflows are on cards; which in the environment of persistent foreign selling would be an additional support for the bourse,” said he.

Aslam added IFSL expects the discount to narrow down owing to uptick in economic numbers, improved law and order situation together with better operating environment, and sector-specific positives.  

“Divestment in the bourse,

in order to introduce new financial products, and increase technological advancements coupled with greater transparency and access to cross-border markets, would be another milestone that would take the benchmark to new highs”. Pakistan also witnessed a surge in mergers and acquisitions (M&A) 2016. Dutch firm, Friesland Campina, one of the world’s largest diary companies, bought a majority stake in Engro Foods for $450 million. Turkish firm Arcelik acquired Dawlance Pakistan (one of Pakistan’s leading appliances company) for $258 million. In banking sector, MCB Bank, Pakistan third largest bank, announced its merger with NIB bank at an estimated deal size of $166 million.  Moreover, Shanghai Electric recently made it public they are buying a majority stake in K-Electric (KEL) for $1.7 billion.

Experts still find equities as one of the most lucrative asset classes as property issues are expected to keep real estate transactions slightly mundane, while exposure to commodities is still available --through building position in commodity related stocks like oil, textiles, fertilizers etc. As far as debt securities are concerned, such low interest rate environment is hardly expected to create much charm.  Despite facing typical third world country issues, Pakistan’s macro numbers improved.  This improvement was an upshot of successful completion of the IMF program, a sharp fall in inflation, a decline in interest rate, stable exchange rate, and greater investor confidence, improved ratings, and the CPEC project etc.

While the upcoming year is expected to witness change in central bank’s monetary stance backed by higher inflationary pressure, local currency is also expected to depreciate as the greenback has been continuously gaining after Brexit and the change of regime in US.

Since the country will enter the repayment phase, the rupee depreciation would test the economy, while foreign reserves might deplete as exports continue to fail in showing any mention-worthy recovery.

However, market expects higher foreign investments as well as GDP to clock in close to 5.5 percent on the back of higher public spending and growth in service sector.  Besides, PSX again stands amongst one of the top-performing equity markets in the world, and on top amongst most of its Asian peers, once again outperforming in its MSCI Frontier as well as Emerging Market categories.