Morning Call about – KSE100: Still attracting foreign flows unlike the entire Asia region – Arif Habib Limited

Karachi, September 02, 2013 (PPI-OT): World equities topple, KSE relatively sustained so far! As the probability of reversal in the FED’s stimulus (USD 85bn per month for bond buying) seems increasingly imminent, Arif Habib Limited saw world’s emerging markets shattering to nerves, as a result.

According to Arif Habib Limited and, therefore, the previously most- flourishing Asia Pacific equities faced one of the biggest single-month falls during Aug’13 – Emerging equities, particularly those with CADs, were battered the most as foreign funds withdrew big time causing a nosedive in domestic currencies against the greenback so far. However, Pak equities remained relatively calm in Aug’13, paralleling only average regional decline.

Pak equities remain top-notch in the world with 22% return Jan’13 YTD With the Aug’13 close when almost all the regional equities were in red, KSE recorded decline parallel to regional average (-7.5% in USD term against Asia Pac average -7.6%), primarily due to local selling. Despite this, KSE100 still yielded a solid 22% Jan’13 to date, highest amongst peers, see table alongside. In PKR terms, KSE100 yielded 4.9% MoM and still a massive 31% Jan’13 to date. With the MoM decline in the market, KSE’s average traded value stood at USD 107mn, down 19.4% MoM, up 98% YoY with average volumes standing at 201mn shares, down 20% MoM, up 29% YoY in Aug’13.

Only second to S. Korea in attracting foreign ‘inflows’
Once again, KSE has been one of the only two Asia Pac markets, after S. Korea, which not only kept foreign flows with it but also attracted additional bread in Aug’13, to the tune of USD 27mn – almost same as last month’s (adjusted for one-off outflow of USD 141mn for KAPCO deal). Cumulative inflows since Jan’13 now stands at USD 324mn (USD 47mn last year same period).

That’s encouraging on part of Pak equities keeping in perspective huge outflows of USD 2.72bn from the Asia Pac region in Aug’13. With Asia Pac’s remaining total YTD flows at USD 4.62bn, Pakistan’s share in foreign flows now stands at a fat 7% that has hardly been considerable in the past.

Corporate result mixed, foreign outflows feared amid currency devaluation. Recently, market euphoria remained high primarily due to full-year corporate result season where most of the companies have so far announced healthy (surprising) cash payouts with the results while few remained on the down side. However, uncertainty over policy rate in the upcoming monetary policy (now delayed to mid Sep’13), high inflation (amid massive power tariff hike), and cracks appearing in the cement sector price arrangement alongside local investors’ fear of foreign investor’s pullout as the entire region is experiencing, have led to decline in overall equities.

Although a concern for the economy, PKR depreciation has largely been taken as positive since it benefits key market-driving sectors such as IPPs (USD- based return mechanism), Textiles (for improved exports), EandPs (USD-based product pricing), Telecom (USD-based LDI earnings) and Chemicals (USD- denominated margins) while the situation stands mixed for Cements (fuel import cost v/s exports), and negative for OMCs (extended LC and timing difference between imported and actual pricing). During Aug’13, most of blue-chip sectors were down while only 2nd and 3rd tier outperformed (see table on the left for sector-wise performance in Aug’13).

Outlook
With the decline in PKR against the USD in Aug’13 (2.7% MoM on closing basis, 4.8% Jul’13 to date), Arif Habib Limited expects Jul-Sep’13 quarter earnings for the mentioned sectors to beef up in addition to the support provided through the recent cut in the policy rate by the central bank (50bps to 9% in its last MPS).

Arif Habib Limited believes, the upcoming IMF deal (fresh loan expected around USD 6.5-7.0bn with first tranche at USD 2.5-3.0bn to be disbursed), privatization news flow ahead and a status quo in the upcoming monetary policy should provide KSE100 reasons to sustain high returns. Any delay or the opposite in any of the mentioned developments would obviously keep Pak equities in check. Currently, the KSE100 is trading at a 2014 forward PE of 6.9x (39% discount) and an attractive forward dividend yield of 6.9% (58% discount).

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