Pakistan Stock Exchange remains under pressure during March 2021

Weak market sentiments at the end of result season were further dampened by political ambiguities (senate elections, changes in cabinet). As a result, benchmark index of Pakistan Stock Exchange (PSX) closed March 2021 on a negative note, down 2.8%MoM to close at 44,588 points.

Even improving external account position (rupee appreciation, IMF disbursement of US$500 million, successful issuance of Eurobond) failed to lift the sentiments. Average volume declined to 598.3 million shares as compared to previous two-month average of 772.4 million shares and 8MFY21 average of 624.4 million shares. Average traded value was in line with previous two-month average of Rs36 billion, signaling shift to top tier stocks.

Amongst major sectors, OMCs and Chemicals were the leaders with a gain of 2.8%MoM and 2.4%MoM respectively. Performance of OMCs was linked to margin expansion (EPCL margins up 36.7%CYTD whereas that of LOTCHEM was up 54.2%CYTD). Textile composites experienced the heaviest decline, down 11.2%MoM. All-Sector chart was topped by Glass & Ceramics with a gain of 22.5%MoM followed by Leather & Tanneries +17.8%MoM, while Cable & Electrical goods were the laggards, down 11.5%MoM.

Flow wise foreigners remained net seller with net disposal of US$8.47 million in March 2021, taking CYTD net to US$16.5 million. However, selective foreign buying was witnessed in the latter part of the month in the wake of rupee appreciation. Mutual Funds and Companies also emerged net seller with US$16.9 million and US$10.7 million respectively which was absorbed mainly by Insurance and Individuals with net buy of US$15.8 million and US$11.1 million respectively. Excluding last day’s net buy of US$7.41 million, individual’s net buy during the month under review was reported at US$3.7 million as compared to 12-month net buy of US$26 million indicating anchoring role of individual participants to have subdued in the recent month.

With political frenzy in the background, attention in April 2021 is likely to be centered on four key inputs: 1) corporate earnings, 2) economic data points, 3) interest rates, and 4) budgetary measures in the near term. Earnings are likely to continue their strong run for the quarter ended on 31st March 2021, following rupee appreciation (up 4.3%QoQ), and raw material inventory built up by manufacturing players (evident from Rs189 billion increase in working capital loans in last quarter of CY20) countering pressure from bull-cycle in global commodities (+11.0%QoQ) on 1QCY21 input costs.

On the flip side, increasing inflationary pressures could boost expectation of interest rate hikes snowballed by potentially tough budgetary measures where Government of Pakistan has already agreed Rs6 trillion FBR target with IMF for FY22 as against Rs4.7 trillion for FY21, which could keep market range-bound in the coming months.

That said, Pakistan’s long term growth story remains intact with additional support coming from robust external account position and improving prospects of trade with India. Analysts continue to like Cements, Steel and other Construction and allied sectors. Their top picks include LUCK, MLCF, DGKC, and MUGHAL. They also like Chemicals (on margin expansion) and Autos (rupee appreciation and strong demand).