Equities remain under pressure in November

Pakistan Stock Exchange, in a repeat of recent performance failed to hold onto mid-month gains, November closed with a muted gain as the benchmark index gained 2.6% increase in Rupee terns and paltry 1.2% in US$ terms.

Politics remains in flux, with PTI keeping up the pressure on the ruling coalition, while the economy - and the external account position in particular - remains vulnerable.

However, these top-down concerns are balanced against ultra-cheap valuations, with the market absorbing the surprise 100bps rate hike reasonably well and foreign investors turning net buyers in oil & gas exploration after a significant gap.

Analysts believe economic outlook takes precedence over political developments, with the former paramount in determining the near-term course of the KSE-100. The pending 9th IMF review is the key deriver.

Imran Khan had an eventful November, to say the least! He survived an assassination attempt, ended his march to Islamabad, and has threatened to dissolve the Punjab and Khyber Pakhtunkhwa provincial assemblies. The overall calculus remains the same, to force early general elections but there is some change in tack, with the US no longer blamed for his ouster, and a less combative stance adopted towards the army in the run up to the appointment of the new army chief.

General Munir faces the tough task of regaining lost face for the army (in farewell speeches, his predecessor vowed the institution will be apolitical), while also focusing on preserving hard-fought security gains given the Tehreek-e-Taliban Pakistan (TTP) has recently ended its ceasefire.

The major win in November for PML-N was the issuance of a diplomatic passport to Nawaz Sharif. His eventual return to Pakistan, subject to legal relief, cannot be ruled out.

The PML-N led ruling coalition is anticipated to complete its term in the center, but there is still a significant lack of clarity on political outlook.

Sustaining the IMF program remains critical. There is greater realization that Pakistan needs stability to put economy on track.

After no change in the preceding two monetary policies, the State Bank of Pakistan (SBP) raised the policy rate by 100bps to 16%, with high inflation and external account vulnerabilities outweighing weak GDP growth.

A return to prudent policymaking possibly signals the overarching importance of sustaining the ongoing IMF program but there are challenges – no date has been set for the 9th IMF review

 The PKR appears to have been kept in check by import controls and restrictions on the movement of foreign exchange and fear of a mini-budget to impose additional taxation may yet be in play to make up for flood-related losses.

There are positives, with the SBP Governor announcing Pakistan will repay its international Sukuk ahead of its scheduled December 05, 2022 maturity, as partial offsetting funding from the AIIB has already been secured.

However, with the import cover a shallow 1.5 months, analysts believe Pakistan not only needs to sustain the IMF program, but also fast-track the promised assistance from Saudi Arabia and China (debt rollover and additional financing). Potential measures such as a higher levy on diesel may be taken as leading indicators for the government’s will in keeping the IMF program on track.       

Analysts expect equities to respond more closely to the evolution of foreign exchange reserves in the near-term, rather than noisy politics which may already be in the price. Valuations are ultra-cheap backed by more companies announcing share buybacks, most recently BAFL, and mean reversion implies significant upside through the cycle.

MSCI changes are also generally positive, with LUCK, SYS, TRG and POL added to the FM100 Index effective end-November. For our top picks, we replace EFERT with ENGRO and PSO with APL. EFERT’s theme of a high dividend yield loses a little luster in the higher interest rate environment, while ENGRO offers a good blend of both yield and growth. With tough reforms appearing unlikely for now, including on the energy side, APL’s stronger fundamentals win out over cash-strapped PSO. 

 

Pakistan Stock Exchange Benchmark Index Declines 3.4%WoW

Moving along the trend set in motion in previous week, Pakistan Stock Exchange posted negative performance throughout the week. On last trading day of the week ended on 24th September 2021, bench mark index closed at 45,073 points, touching a low of 44,788 points. 

During the outgoing week, the index cumulatively lost 1,562 points or 3.4%. A 25bps hike in interest rates by the central bank suggests further hikes in future.

Other major news flows during the week included: 1) the central bank tightening regulations on consumer financing and mandating banks to share 5-day import payments schedule, 2) the GoP considering re-imposing higher regulatory duties to curb auto imports, 3) Petroleum division proposing to increase gas prices by up to 35 percent, 4) Pakistan planning to issue international Sukuk in October 2021 to raise US$1.5 billion and 5) EU extending GSP+ status for Pakistan with six new conventions.

Volumes relatively dried up with average daily turnover sliding to 383.5 million shares as against 400.1 million shares a week ago. Major activity tilted towards main board items. Pressure was witnessed across sectors, with Engineering hit the most, registering a decline of 6.3%WoW followed by Auto Assemblers, down 5.9%WoW. Refineries emerged the worst performer (down 17.2%) over uncertainty on refinery policy. The resignation of SAPM Tabish Gauhar, the architect of the Policy, hints towards possible delays in finalization of the Policy.

Flow-wise, Foreigners and Others played a major role in absorbing selling pressure by other participants, with cumulative net inflow at US$12.6 million, while Individuals and Companies cumulatively squared US$11.0 million positions. The major gainers were: HMM, PSEL, SCBPL, ARPL and SNGPL, while laggards were, ANL, ATRL (down 17.9%WoW), BYCO, PAEL and BNWM.

Market is likely to remain volatile in the near term, direction to be determined by IMF review. Reversing certain incentives such as in the case of Autos should be viewed as material positive particularly from a macro perspective, easing pressure on external account. Moreover, investors should adopt a top-down approach to investing where possibility of further interest rate hikes could bring Banking Sector into limelight, while Techs and Textiles (on currency depreciation where stronger earnings are yet to be priced in) are other sectors of interest. Techs may remain under pressure owing to structural impediments faced by one of the companies. The weakness should be taken as an opportunity to accumulate.

Selling by foreigners keeps Pakistan stock market under pressure

The benchmark of Pakistan Stock Exchange breached 40,000 mark during the week ended August 19, 2016. This prompted the investors to indulge in profit taking in the later part of the week to pull the index below 40,000 level. Foreign selling added to the pressure with outflows for the week at US$18.38 million considerably higher than US$1.03 million earlier. Daily average volume for the week also declined 12.9%WoW to average 230.69 million shares.

Key news flows during the week included: 1) MTB yields remain unchanged across all tenors in the week’s auction despite heavy participation with bids amounting to above Rs659 billion where the GoP raised Rs373 billion, 2) FDI declined 14.6%YoY with net flows of US$64.3 million in July’16 with total foreign investment for the month at US$113.9 million on rising portfolio investments, 3) the NA Standing Committee on Finance approved the Benami Transaction (Prohibition) Bill, 4) ECC approved sale of imported urea available with NFML at a discounted price of Rs1310/bag compared to the subsidized local price of Rs1,400/bag, 5) GoP got ready to float fresh tenders for the import of 200 mmcfd of LNG to cope with the expected surge in demand during winter this year and 6) Privatization Commission sought comfort letter on PPA and generation license of KAPCO from the Ministry of Water & Power to offer GoP’s residual shares to investors during domestic road shows.

Interest in the coming week is likely to be centered on remainder corporate results for the quarter. Major companies scheduled to announce results include HUBC, KAPCO, OGDC, CHCC, BAFL, NBP and INDU. However lacking major triggers, the broader market is expected to remain listless. Global crude prices are likely to be tracked keenly ahead of OPEC’s meeting next month.

Renewing concerns on potential slowdown in remittance flows on worsening global financial dynamics, inflows during July'16 marked a sharp decline of 20%YoY/36%MoM to US$1.33 billion ‐ the lowest monthly flow since April'14. This reflected unfavorable developments that included: 1) slowdown in GCC economies on oil price slump and 2) US regulatory tightening on money transfer. While room remains for volatility in the Rupee on sluggish remittances, analysts maintain their FY17 forecast of 3% PkR/US$ depreciation on Pakistan’s foreign exchange reserve strength. In terms of its implication on the banking sector, some revenue dilution can be expected in UBL, HBL and NBP with remittances contributing more than 10% to total fee income approximately. However, expansion in branchless banking segment is likely to provide a buffer to any downside arising from slower remittances growth having no material impact on banks' earnings.

Exhibiting the brunt of monsoon season, latest APCMA's dispatches data depicts domestic demand growth of 3.9%YoY in July'16, far lower than 9.2%YoY growth in June'16. While flatter exports during July’16 as compared to the previous month indicated that freefall has likely ceased, settling at new normal levels post anti‐dumping duties imposed by major cement export markets (South Africa/Iraq). However, exports increased 20.2%MoM in July'16 as against a 15.7%MoM in July'15. While the slowdown in demand has much to do with the seasonal factors, analysts believe demand to start picking up from August'16 as construction activity is likely to pick pace post‐monsoon.