Pakistan Market Jan’15: Market Review and Outlook Capital Market Indicators: KSE100 Index KSE100 Index 30‐Jan‐15 52 Weeks High / Low 34,444 34,538 / 25,479 52 Weeks Avg. Vol mn 138 52 Weeks Avg. Val. USD mn 83 Key Sector Performances Sectors Return Major Gainers Chemicals 16% Telecom 12% Food Producers 11% Cements 8% Electricity 6% Automobile 6% Textile 3% Banks 2% Oil & Gas 2% Source: NCCPL, BMA Research Sector Wise FIPI Flow (USDmn) in Jan’15 19 10 (5) (5) (2) (2) (1) 1 1 Banks Food Producers Textile Financial Svs. Telecom Chemicals Oil and Gas Electricity All other sectors Cements (13) Source: NCCPL, BMA Research Muhammad Affan Ismail, CFA [email protected] +92 111 262 111 Ext: 2058 Monday February 2, 2015 The Karachi Stock Exchange (KSE) kicked‐off CY15 on a high note as the index gained an impressive 2,313 points (up 7.2%) in Jan’15, the highest monthly performance during FY15TD. During the review period, average daily turnover improved by 23%MoM to 304mn shares while average traded value also improved by 28%MoM to USD164mn, indicating market focus towards blue‐chips amid expectations of strong earnings announcements (barring the Oil & Gas chain) and DR cut. Foreign participation remained mixed as strong inflows in Banks (USD19.4mn) and Food Producers (USD10.3mn) were offset by selling in Cements (‐ve USD13.2mn). At the same time, local Mutual Funds’ participation remained aggressive at +ve USD59.2mn in Jan’15. SBP’s decision to cut the DR by 100bps resulted in a positive euphoria as investors largely ignored disappointing results for the Oil & Gas sector (POL, PPL, APL and ATRL). With politics a back page story, we believe the market looks set to continue its strong run with key check points being i) the outcome of the 6th IMF review (inflow of USD550mn), ii) healthy result announcements (Banks, Cements, Textiles) and iii) continued impressive inflation numbers. Regarding the latter, Jan’15 CPI is to be announced today where BMA expectation stands at 3.8%. Lower inflation and consequent continued high real interest rate makes the case for another 50bps minimum cut in the DR in 2HFY15. We re‐iterate our conviction on stocks with leveraged balance sheet and strong earnings growth ‐ ENGRO, PSO, NML, MLCF, FCCL, GATM and SEARL. An impressive start to 2015 – Jan’15 yielded 7.2%: Marked by much awaited 100bps cut in DR coupled with stable domestic politics, the KSE‐100 delivered strong gains of 7.2% in Jan’15, translating into a healthy FYTD return of 16.2%. Broad based macro improvements driven by falling oil prices and consequent lower CPI and monetary easing improved investor sentiment. Mutual Funds’ market participation remained aggressive with a net buy of USD59.2mn while net foreign participation remained tepid at USD2.8mn where inflows in Banks (USD19.4mn) and Food Producers (USD10.3mn) were mitigated by selling in Cements (‐ve USD13.2mn). Relative stability in oil prices (hovering around USD43/bbl) offset the impact of negative surprises in POL and PPL results. During the period under review, uncertainty on Pharma drug pricing policy, adverse law order situation in Karachi and news flow on lowering of Banking spreads by Jun’15 end were amongst the few negative developments that capped the upside in the market. Sector Performance: In terms of sector performance, Chemicals (up 16% on strong gains in ENGRO), Telecoms (up 12% on rumors of reinstatement of ICH), Food Producers (up 11% on expectations of better results of EFOODS) and Cements (up 8% on improved dispatches and reduced fuel/power cost) remained the outperformers while Banks (up 2% on DR cut), Oil and Gas (up 2% on expectations on weak 2Q results) and Pharma (up 1% on uncertainty surrounding drug pricing formula) were amongst the notable underperformers. Investment Perspective: With disappointing results by the Oil & Gas chain behind, we believe healthy result announcements (accompanied by interim payouts) for Banks, Cements, Autos and Textiles are likely to lead the next leg of rally at the KSE‐100. This coupled with Jan’15 CPI announcement (BMA estimate: 3.8%), making another case for 50bps cut in 2HFY15, will continue to keep the investor sentiment upbeat. The outcome of ongoing 6th IMF review will also remain a key event, going forward. We re‐iterate our conviction on stocks with leveraged balance sheets and strong earnings growth ‐ ENGRO, PSO, NML, MLCF, FCCL, GATM and SEARL. 1