Market remains bearish as political uncertainty persists

The capital market will remain under the shadow of bears as the current results season is yielding disappointments, while political uncertainty is expected to persist until at least the new cabinet is sworn in, an analyst said on Saturday.

“With the bull run during the preceding week run largely driven by positive sentiments for the elections results rather than changes in fundamentals, post-election profit taking ensued in the market,” an analyst from Habib Metro Financial Service said.

He recommended investors to stay cautious and search for attractive valuations in blue-chip stocks.

The bears regained control over the bourse during the week as market participants looked to capitalise on the sentiment-driven rally in the previous week. This caused it to shed 281 points or 0.7 percent to close at 42,505 points.

However, optimism driven by clarity on politics was still reflected in participation, where average daily turnover improved by 21 percent to $284 million and average daily value of shares was simultaneously up by 39 percent to $97 million.

Foreigners took advantage of increased trading activity on the local bourse and offloaded shares worth $14.6 million during the week. Domestic mutual funds and banks also continued with their selling spree as they sold shares worth $7.1 million and $6.0 million dollars.

On the other hand, individuals continued to stand out as net investors as they bought shares worth $26.4 million dollars during the week (up from $19 million last week).

In his briefings to the media, Asad Umar (widely tipped to be the next finance minister) did not rule out the possibility of Pakistan’s re-entry into another International Monetary Fund (IMF) Program. More importantly, he highlighted that once in power he will look to implement the following two reforms on a war footing basis: 1) create a sovereign wealth fund and move government entities into the fund to limit the involvement of bureaucracy and politically motivated decision-making and 2) expedite release of refunds (export incentives, sales tax etc) to the industry to revive the ailing manufacturing sector.

US Secretary of State Mike Pompeo’s remarks about Pakistan’s potential IMF bailout were however concerning. He warned that the bailout for Pakistan’s new government should not provide funds to pay off Chinese lenders.

Commercial banks dragged the index down as investors dumped shares of two key financial stocks - United Bank Limited (UBL) and Habib Bank Limited (HBL) on disappointing earnings.

UBL lost 11.2 percent during the week after it posted a decline of 40 percent in its second quarter of 2018 earnings (EPS: Rs2.78) where the negative surprise emanated from an unexpected Pension Liability Provisioning of Rs2 billion.

HBL fell 9.8 percent after it also reported a decline of 48 percent in its second quarter with EPS Rs2.29 due to lower than expected net interest income and a significant surge in admin expenses.

Amongst outperforming sectors, power and distribution companies gained 3.5 percent during the week with Kot Addu Power (KAPCO) and Hub Power gaining 8.1 percent and 3.4 percent, respectively.

An analyst from BMA Capital Management said that with the results season in full swing, investors were likely to focus on stocks with annual dividend payout policy and/or earnings surprise.

“We highlight that in coming weeks some big names, which are scheduled to announce their year-end/half yearly results include: Allied Bank, Pakistan State Oil, Indus Motor, Kot Addu and Engro Fertilizer,” he said.

The market is keenly tracking progress on formation of the government in the centre and provinces, particularly in Punjab where the number game suggests a close contest between PTI-led coalition and rival political parties (PML-N, PPP and MMA).