After posting stellar 46.5% plus gains on avg. during the previous two years (FY13-FY14), the benchmark KSE100 Index during FY15 gained 16.0% to close at 34,398.9pts. During the period under consideration, the market touched the peak of 34,826.5pts on the back of 100bps surprise DR cut in Jan’15 while at the same time due to an increase in the political temperature it touched lows of 27,774.4pts. In addition to this, FY15 also marked the year where avg. daily trading volumes and values rose to 6yr high at 215.9mn shares and US$107.6mn, respectively. The aforementioned performance of the KSE-100 can be attributed to 44% FY15TD decline in the international oil prices which consequently led to a subdued performance by index heavyweight Oil & Gas sector (down 25%YoY). In addition to this, performance of the banking sector (another index heavyweight) also remained lackluster owning to a soft interest rate environment and regulatory overhang. Furthermore, during the period under review, sectors occupying 45% of the KSE market cap concluded the year in the red (down 17%YoY) while 55% of the market posted an aggregate growth of 55%YoY. Going forward, with oil prices expected to trade in the band of US$50-70/bbl, immediate recovery from the Oil & Gas sector seems unlikely. Additionally, lack of clarity over regulatory overhang dissipating is likely to keep the banking sector’s performance in check, at least in the near term. On the flip side, valuations in construction related sectors, electricity and selective chemicals are still fundamentally attractive and investors are recommended to align their portfolios accordingly.

  Kayani's War

Market activity: FY15 also marked yet another year where we saw improved investor participation at the bourse. Although the market’s avg. daily traded volume increased by a mere 1%YoY in FY15, the avg. daily traded value increased by an encouraging 27%YoY. This showcases that investors opted for rather pricy stocks in FY15 than they did in previous fiscal year. During FY15, Mutual funds (US$122.17mn net buy), NBFCs (US$68.2mn net buy) and FIPI (US$38.6mn net buy) along with Other Organizations (US$40.9mn net buy) remained net buyers at the bourse. Conversely, selling¬† came from Banks (US$137.9mn), companies (US$97.0mn), and Individuals which sold equities worth US$24.5mn.

Sectoral performance: Index performance during FY15 was dragged down by some index heavyweights – Oil & Gas (tumbling global oil prices) and Banks (squeeze on margins) with a cumulative weight of 39%. Amongst all 32 sectors, 6 sectors with cumulative index weight of 45% remained in the negative territory as they yielded negative returns of 17%. These included Oil & Gas (-ve 25%YoY), Fixed Line (-ve 19%YoY), Tobacco (-ve 17%YoY), and Commercial Banks (-ve 6%YoY). On the other hand, 26 sectors which made up for 55% of the market’s weight registered 34%YoY growth. Amongst the ones that posted gains, key sectors included Autos (+ve 94%YoY), Electricity (+ve 63%YoY), Construction and Materials (+ve 47%YoY) and Chemicals (+ve 41%YoY).

Investment perspective: In the backdrop of key developments which include: 1) Pakistan’s rating increase by Moody’s to B3, 2) MSCI’s decision to include Pakistan for EM upgrade review, 3) contained inflation going forward, we believe the tone is set for the market to further consolidate on its current gains. In this regard, we remain firm on our P/E rerating theme, which is likely to accelerate given the aforementioned developments and in this regard, we see KSE-100 Index reaching 37k points level by the end of CY15. That said, we also believe that similar to FY15, the incoming fiscal year will the year where stock picking would be key in realizing majority of the gains.

  Fallacy of Terrorism

Written By Asad Siddiqui