MOST market strategists, fund managers, brokers and analysts stand united in their belief that ‘oil’ — specifically the price of light Arabian crude — will be the biggest factor that will determine the underlying corporate profitability of a large number of sectors, and the direction of the stock market, in 2015.

Having gained 49pc in each of the two preceding years, the KSE-100 index’s gain of 24pc so far in 2014 may seem low. Yet, it is in line with the last 10-year average annual gain of 26pc.

Most market strategists at various brokerage houses confirmed that Pakistan ranked amongst the top 10 best performing markets in 2014 for the third consecutive year, and it took the top slot among Asian frontier markets. So what is expected for the year ahead?


Several market gurus believe that the bourse would maintain the bullish momentum


Several market gurus believe that the bourse would maintain the bullish momentum. Mohammad Sohail, CEO of Topline Securities, expressed confidence that the market could see a 17-23pc growth in 2015, which would carry the KSE-100 index to 36,000-38,000 points, from the current 31,700 points.

He reasoned that the economic recovery, benefits of falling global oil prices and rising foreign portfolio investment could ‘re-rate’ the market from its historic average price-to-earnings (p/e) ratio of 9-9.5 times. The market is also likely to benefit from ample cash liquidity with local investors in a decreasing interest rate scenario, he said.

Why oil?: Economists point out that oil constitutes 36pc of Pakistan’s total import bill, and the current 40pc decline in the last four months could lead to an estimated saving of $1-2bn this fiscal year.

“If the trend continues, the country could witness a current account surplus in FY16,” says Professor Zeeshan Qureshi, who teaches at a business school in Karachi. The steep decline in oil prices would be a blessing for the power sector as it would lead to a decrease in the cost of generation and a reduction in ‘circular debt — which has been at the heart of the energy crisis and has affected GDP by as much as 2pc.

“The drop in oil prices has improved the overall macroeconomic outlook of the country as lower fuel prices would not just reflect in lower CPI numbers, but would also be a big blessing for the manufacturing sector, which relies on the national grid for its energy needs,” says Prof. Qureshi. As a result, the manufacturing sector is expected to grow 4.7pc in FY15, and this would inevitably be demonstrated in improved corporate profits.

Corporate profits: Corporate profitability in 2014 was noted to have recorded a sizable growth, which was one of the fundamental reasons for the dominance of bulls at the stock market.

Raza Jafri, head of research at AKD Securities, forecasted that the “overall corporate profitability will retain its secular uptrend going forward, in line with the three-year combined annual growth rate of 18pc”.

Yet analysts believe that corporate performances would vary from sector to sector. While oil and gas exploration and production companies and banks stood out as star performers in the outgoing year, fertilisers and oil marketing companies (OMCs) were a blot on the corporate bottom line. In 2015, the performance of OMCs is expected to remain under duress as declining oil prices could cause heavy inventory losses.

While the market is expecting the cement sector to be the top performer in the upcoming year due to rising demand for the product and the industry’s pricing power, textiles could also reap benefits of the GSP Plus status. Meanwhile, the automobile sector has given out the highest return of 131pc in 2014.

Re-rating: KSE’s former chairman Arif Habib asserts that corporate profitability is likely to witness a steep rise, given positive developments like improving macroeconomic indicators, softening inflation, lower interest rates, steep decline in oil prices, and the fattening of foreign exchange reserves to $15bn. This would allow local and foreign fund managers to ‘re-rate’ the market in 2015 in terms of p/e ratios and equity prices.

Foreign portfolio investment: Foreign Investors Portfolio Investment (FIPI) during 2014 to-date stands at around $697m; it amounts to $376m net of UBL’s secondary public offering. Market participants believe that foreign inflows may continue during 2015 as the government offloads its shareholding in companies.

Foreigners currently hold $6bn worth of shares and account for 33pc of the free-float and 9pc of the market capitalisation.

Looking ahead, Topline Securities’ Sohail asserts that the country’s resilience despite the energy and security issues — proved by the stock market’s exceptional performance in the last three years — is making it distinctly visible to foreign investors. However, he cautioned that a major foreign outflow remains the biggest risk for 2015.

New offerings and privatisations: There were nine share offerings during 2014, for an aggregate size of Rs73bn — three times the earlier year’s new issues. Yet, much of it was due to the government’s divestment of shares of three companies: UBL (Rs38bn), Pakistan Petroleum (Rs15bn) and Allied Bank Ltd (Rs14bn).

Privatisation Commission Chairman Mohammad Zubair told Dawn that the sale of strategic assets would commence in early 2015, and the capital market transaction of Habib Bank Ltd would be completed by March.

Some of the other transactions in line include those for PIA, Pakistan Steel Mills, National Power Construction Company and some power distribution companies.

Brokers say they are also expecting initial public offerings, and the KSE’s list of share price quotations shows multiple IPOs in the pipeline. Under ‘applied for listings,’ the bourse has placed ‘International Brands Limited’ and ‘Mughal Iron and Steel Industries,’ while the offer for sale of ‘Synthetic Products Enterprises Limited’ has been cleared by the exchange.

Published in Dawn, Economic & Business, December 29th, 2014

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