In its
latest meeting OPEC decided to maintain its oil output. This has triggered
another slide in global crude oil prices. There are growing expectations that
prices may remain low for longer than expected period.
One of Pakistan’s
leading brokerages houses has analyzed possible implications of lower oil
prices on the local stock market under three oil price assumptions of Arabian
Light crude (WTI and Brent are less related to Pakistan as the country buys
crude mainly from the Middle eastern countries. The brokerage house has based
its analysis on three assumptions: 1) US$35/bbl, 2) US$40/bbl and 3) US$45/bbl)
against its base case of US$50/bbl.
Remaining a
key positive on the macro front, significant improvements are expected on 1)
the BoP position on lower oil imports and 2) controlled inflation opening up
room for continued monetary easing.
However,
from the market's perspective this scenario will be a drag on index heavyweight
Oil & Gas sector. Additionally, lower interest rates will continue weighing
on banking sector's performance, however boding well for leveraged plays and
high dividend plays.
Pakistan
continues to benefit from lower oil prices, where another slide in the
commodity's price holds positive implications for the country. Sensitivity
analysis undertaken by the brokerage house indicates that with US$5/bbl
reduction in CY16 will result in additional import bill savings of US$8 million/annum
where oil averaging below US$45/bbl could comfortably lead to current account
surplus for FY16.
Besides
helping to sustain recent improvements in the BoP position, lower oil prices
also have trickle down benefits on inflation, which can sustain at current
levels (2.5%YoY average in CY15) across the medium term. With lower fuel costs
and indirect impact on food, the sensitivity analysis indicates CY16 CPI
average can hover in the range of 2.8% to 4.2%YoY.
A downwards
trend in oil prices can effectively counter the low-base effect on CPI numbers,
unlocking room for further monetary easing. While room could exist for a rate
cut at US$45/bbl average. It is expected that the central bank may remain
cautious with potential and discount rate may hover around at 5.5% at the lower
extreme.
Pulled lower
by falling global oil prices, Oil & Gas companies have experienced broad
based selling (down 33%CYTD). E&Ps suffer from hampered profitability with
POL being the most affected on account of high oil price partiality (53% of
revenues in FY15). That said, the gas heavy (80%+ of overall production,
1,173mmcfd in FY14) OGDC continues to persevere in the E&P sector as its
profitability is the least hurt by tumbling oil prices. Volatility in oil
prices and its consequent impact on the interest rate cycle is likely to have
negative implications for banking sector's profitability.
For the
Big-6 banks, this is most likely to reduce CY16 earnings by 5%-18% assuming the
worst case scenario. However, factors such as potential increase in the capital
gains backlog and any uptick in private sector credit growth are expected to
provide support to bottom-line should the interest rates come down further. In
this backdrop, banks with a higher CASA ratio, greater concentration towards
high margin consumer/SME segments, and higher PIB/investment ratio are expected
to fare better than the rest.
While Oil &
Gas and Banks are likely to bear the brunt in case of lower oil prices and
continued monetary easing, brokerage house sees cost side benefits trickling down
to sectors with 1) high leverage sectors like Fertilizers, Cements and Telecom
2) higher fuel and energy costs sectors like Cements, Foods ,Shipping and
Aviation.
Apart from
these, Power sector is likely to benefit from reduced liquidity constraints
amid lower cost of generation while a lower interest rate environment should
keep the sector in limelight on account of attractive dividend yields.
