Pakistan Stock Exchange witnesses lackluster movement

The week ended on December 16, 2022 witnessed a range-bound movement of the benchmark index. The highlight of the week was Thursday when the market took a hit and the index posted 1.0%WoW decline to close at 41,301 points.

Economic uncertainty caused by enhanced delays in the 9th Review of the IMF program, along with rising interest rate led to a lackluster sentiment in the market. Further exasperating the sentiment is the critical level of the country’s foreign exchange reserves, having dropped to USD12.6 billion. Average daily trading volume decreased further by 9.9%WoW, down to 180 million shares.

Major news flows during the week were: 1) five financing pacts worth US$775 million inked with ADB, 2) IMF wants to observe 3 more quarters, examine flood rehab plan, 3) Saudi Arabia may increase the amount of oil supply to Pakistan on deferred payments to US$2.4 billion a year, 4) Reko Riq project got green signal with definitive agreement signed, 5) Jul-Nov workers’ remittances decline 9.8%YoY, 6) Fed raised rates by half percentage point, sees economy nearing stall, and lastly 7) Jul-Oct LSM sector output down 2.89%YoY.

The top performing sectors were: Miscellaneous, Tobacco, REIT, Textile Composite, and Vanaspati & Allied, while the least favorite sectors were: Leasing companies, Automobile Parts, Close-end Mutual Funds, Refineries, and Jute.

Stock-wise, top performers were: PSEL, PAKT, SYS, ENGRO, and DCR, while laggards included: PGCL, LOTCHEM, TGL, THALL, and MTL.

Flow-wise, Foreigners topped the net sellers, offloading US$9.6 million followed by Mutual funds (US$7.1 million), Individuals (US$2.5 million), Insurance Companies (US$1.4 million) and NBFC (US$0.1 million). While Banks, Companies, Other organizations and Brokers were on the buying side, with a net buy of US$12.8 million, US$6.2 million, US$1.5 million, and US$0.2 million respectively.

With the rising policy rate amid political uncertainty, the market remains in a state of indecisiveness. Incoming news regarding delays in IMF was bound to invoke some gloom; the longer is the delay the more the uncertainty is going to influence the market, keeping volumes away.

The local currency has started paring some of the gains it had made recently, depreciating to PKR225/USD as the foreign exchange slips to critical levels despite restrictions on the opening of L/Cs.

With the winters approaching, inflation is expected to remain persistent. The market participants expect another cumulative rate hike of 200 bps in FY23.

Pakistan: Likely facets of Federal Budget FY23

Government of Pakistan (GoP) is scheduled to announce Federal Budget FY23 on June 10, 2022. Relations between International Monetary Fund (IMF) and Pakistan have not normalized despite change of Prime Minister. 

While it is anricipated that the upcoming budget will have measures that can ensure austerity and economic stability, the incumbent government is likely to opt for policies which can help the coalition remain in power over the next 18 months.

Budget outlay for FY23 is estimated at around Rs9.5 trillion as against budget of Rs8.5 trillion for FY22.

GoP is anticipated to set tax revenue collection target at Rs7.25 trillion for FY23, which will be 19% higher from the revised target of Rs6.1 trillion for FY22. It is likely to impose new taxation measures of about half a trillion in FY23 budget.

Current expenditure target is likely to be set at 12% of GDP for FY23 or Rs8 trillion which is around 11% YoY higher than what was budgeted for FY22.

Similarly, government is likely to set aside nearly Rs4 trillion for markup payment and Rs1.6 trillion for Defense expenditure.

Federal Public Sector Development (PSDP) is estimated at Rs800bn, as against Rs466 billion disbursed in 10MFY22 and revised budgeted of Rs603 billion for FY22.

Consolidated PSDP (Federal and Provincial) is anticipated at Rs1.4 trillion (1.8% of GDP) for FY23, as against Rs1.2 trillion for FY22.

A few taxation measures that are under consideration include: 1) increase in super tax for Banking sector and re-imposition of super tax on highly profitable companies, 2) increase in tax rate for individuals earning high salaries, 3) reduction in tax concessions and exemptions for various sectors, 4) increase in regulatory duties on luxury items, 5) luxury tax on immovable properties and vehicles,  and 6) increase in taxes for non-filers.

With the economic slowdown, tax revenue target of Rs7.25 trillion will be difficult to achieve for FY23. However, it will depend on the types and amounts of new taxes to be imposed in Budget FY23.

Upcoming budget is likely to be Neutral for Stock Market as we do not anticipate any change in Capital Gain Tax (CGT) rate of 12.5% and tax rate of 15% on dividend income. The budget is likely to be Neutral to Positive for sectors including Technology & Communication, Fertilizer, Insurance and Chemical Sectors. On other hand, it is likely to be Neutral to Negative for sectors including IPPs, Autos, Banks, Oil & Gas Exploration, Cement, Textile, OMCs, Tobacco, Steel and Pharmaceuticals.

Analysts believe that negatives relating to imposition of new taxes on listed companies are already priced in as valuations remain attractive. Market participants are keen to see the overall balance of payment situation and focus to remain on IMF and other foreign exchange inflows along with trend of international commodity prices. 

Pakistan market is currently trading at a discount. Analysts prefer sectors that offer high dividend yield, beneficiary of rising interest rates and currency depreciation.