Pakistan Stock Exchange benchmark index declines almost 5%WoW

During the week ended on September 01, 2023, the benchmark index of Pakistan Stock Exchange declined by 4.95%, losing 2,358 points to close 45,313 level.

NEPRA’s announcement to increase the average national power tariff by PKR4.96/unit for FY24 was met with strong disapproval and countrywide protests.

The business communities and other political parties showed dismay as well and criticized DISCOs over the levied capacity charges on consumers. Moreover, the Finance Division allowed for a massive hike in petrol and diesel prices.

After much anticipation of upheaved inflation figures, August’s CPI was announced as 27.4%, giving a source of comfort during a crunch period.

Given elevated demand for the greenback, Pak rupee witnessed an erosion of 1.4%WoW, reaching PKR305.47 against US$ on Friday. Furthermore, towards the week’s end, the gap between the interbank and open market exchange rates remained 7.4%.

According to the IMF agreement, this gap should not be ±1.25% for 5 consecutive days. Moreover, the forex reserves held by the central bank declined by US$81 million to US$7.85 billion owing to debt repayments and July’s current account deficit can put additional strain on reserves. Cumulatively, these reasons have had a negative impact on the market.

To curb the gas sector’s revolving circular debt, Petroleum Ministry is gearing for a 60% increase in gas prices.

On the bright side, FBR has provisionally collected PKR1.21 trillion during first two months of FY24, against a target of PKR1.18 trillion, reflecting an increase of PKR24 billion.

Market participation witnessed a decline, with traded volume averaging at 187 million shares, as compared to the previous week’s average of 206 million shares.

Other major news flows during the week included: 1) Foreign investors’ buying in August reported at US$12.87 million, 2) PIA demanded PKR23 billion bailout from government, 3) CMEC announced to halt production at Thar coal mines given non-clearance of US$50 million, 4) Total tax collected from power sector including electricity bills was reported at more than PkR160bn for FY23, 5) SBP adopted certain AAOIFI’s Shariah standards, 6) Income tax department levied super tax on non-resident companies in negation of double taxation treaties, 7) DISCOs withdrew up to 41% less power from national grid in 4QFY23, and 8) slightly over 8 million mobile phones were manufactured by local plants during Jan-July 2023 period.

Textile weaving was the top performer, while close end mutual fund/ power generation & distribution/ automobile parts & accessories were amongst the worst performers. Major selling was recorded by Banks/DFI with a net sell of US$6.26 million. Insurance companies absorbed the selling with a net buy of US$7.9 million.

Top performing scrips of the week were: SCBPL, INDU, HMB, AICL, and NRL, while top laggards were: HGFA, DGKC, NML, APL, and NCL.

Going forward, market is in commensuration with outcomes of 1) upcoming Monetary Policy Committee meeting on 14th September, 2) ensuing review with IMF in October, and 3) developments encircling energy reforms.

In the event of an interest rate hike, cyclical sectors may face turbulence, although market has already adjusted for this impact.

Analysts reiterate following a cautious approach while picking stocks and continue to advocate US dollar-denominated revenue stream scrips (Technology and E&P sector) to hedge against currency risk or high dividend yielding scrips.

 

 

US Fed raises interest rates amid global banking turmoil

The United States Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs after the recent collapse of two US banks.

Fed chairman Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of Silicon Valley Bank failed badly, but that the bank’s collapse did not indicate wider weaknesses in the banking system.

“These are not weaknesses that are running broadly through the banking system,” he said, adding that the takeover of Credit Suisse seemed to have been a positive outcome.

Wall Street ended sharply lower after Powell told a news conference that officials were still intent on fighting inflation while also eyeing the extent to which recent bank failures had cooled demand and slowed lending.

The much anticipated rate hike by the Fed, which had delivered eight previous rate increases in the past year, sought to balance the risk of rampant inflation with the threat of instability in the banking system.

But in a key shift driven by the sudden failures in March of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that ongoing increases in rates are likely to be appropriate.

The banking sector has been in turmoil after California regulators on March 10 closed SVB in the largest US bank failure since the 2008 financial crisis.

The collapse of the Santa Clara, California-based bank and Signature Bank, another US mid-sized lender, prompted a rout in banking stocks as investors worried about other ticking bombs in the banking system and led to UBS Group’s takeover of the 167-year-old Credit Suisse Group to avert a wider crisis.

The Fed’s relentless rate increases to rein in inflation are among factors blamed for the biggest banking sector meltdown since 2008.

“The Fed is now living on a hope and a prayer that they haven’t done irreparable harm to the banking system,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.

Meanwhile, as the beleaguered First Republic Bank considers its options, Treasury Secretary Janet Yellen said on Wednesday that there is no discussion on insurance for all deposits.

She told a congressional hearing that the government is not considering insuring all uninsured bank deposits.

She also said the Treasury Department has not considered anything to do with guarantees for assets. First Republic shares closed down more than 15%.

As officials grapple with restoring confidence in the banking system, JPMorgan Chase & Co chief executive Jamie Dimon is scheduled to meet Dr Lael Brainard, the director of the White House’s National Economic Council, during the executive’s planned trip to Washington, according to a source familiar with the situation.

Across the Atlantic, European Central Bank top brass said they will watch for signs of stress in bank lending, a day after the ECB warned banks not to be caught off guard by rising rates.

As investors wonder whether the ECB will be able to continue its own rate increases to fight inflation, its chief economist Philip Lane said market jitters may turn out to be a non-event for monetary policy, while a full-blown

 

US Fed indicates further rate hikes

According to Reuters, US Federal Reserve policymakers on Wednesday signaled they will push on with more interest rate hikes, with several supporting a top policy rate of at least 5% even as inflation shows signs of having peaked and economic activity is slowing.

"I just think we need to keep going, and we'll discuss at the meeting how much to do," Cleveland Fed President Loretta Mester said in an interview with the Associated Press.

The remarks appeared to reflect a widely shared view among her fellow policymakers, most of whom as of December 2022 had penciled in a 5.00%-5.25% policy rate in coming months.

Mester said that for her part she expects the Fed's policy rate to need to go a bit higher than that, and stay there for some time to further slow inflation.

The Fed's benchmark overnight lending rate currently hovers in a target range of 4.25% to 4.50%, and investors expect the Fed to lift that rate by a quarter of a percentage point at the end of its January 31-February 01 meeting.

Spending, inflation, and manufacturing - all reported earlier on Wednesday - have helped stoke expectations that the Fed will end its current round of rate hikes sooner than Mester and most of her colleagues expect, with the policy rate just shy of 5%.

The central bank began raising borrowing costs in March 2022, when the policy rate was in the 0%-0.25% range and inflation was starting to make a climb that would see it rise to 40-year highs, several times the Fed's 2% target.

Like Mester, St. Louis Fed President James Bullard, speaking with the Wall Street Journal earlier, said he too sees the policy rate rising to the 5.25%-5.50% range, and added that policymakers should get it above 5% as quickly as we can.

Several Fed officials have expressed support for slowing to quarter-percentage-point rate increases, after last year's much faster pace of rate hikes in mostly 75-basis point and half-point increments.

Bullard expressed more impatience. Asked if he was open to a half-percentage-point increase at the Fed's upcoming meeting, he asked "why not go to where we're supposed to go? ... Why stall?"

The answer may in part be found in the latest "Beige Book" report published by the Fed on Wednesday. The compilation of survey data from the central bank's districts around the country showed that while prices continued to increase, the pace in most districts was reported to have slowed.

And while employment continued to grow at a modest to moderate pace in much of the country, and several Fed districts reported modest economic growth, the New York Fed reported a contraction in activity, four other districts reported slowdowns or slight declines, and most expected little growth ahead.

Still, Fed policymakers say the mistake they do not want to make is to stop short of defeating inflation, only to have to raise rates even more to do the job later on, as happened in the 1970s and 1980s

Even Philadelphia Fed President Patrick Harker, who is generally less hawkish than Mester or Bullard and wants the Fed to switch to quarter-percentage-point hikes ahead, sees a few more rises in borrowing costs before a pause.

Dallas Fed President Lorie Logan also supports a slower rate hike pace ahead because of the uncertain outlook and the need to be flexible. But she also signaled the Fed may need to raise rates higher than is widely expected to keep financial conditions tight enough to press down on inflation.

"I believe we shouldn’t lock in on a peak interest rate," Logan said in Austin, Texas. She added that even once inflation is headed convincingly down to 2% and the Fed does stop raising rates, the risks will be two-sided and that further rate hikes could be in the offing.

In an interview with Reuters on Wednesday, outgoing Kansas City Fed President Esther George said she felt rates would have to move higher than many of her colleagues anticipate, but that she also would have been willing to move in smaller increments.

“People’s expectations about inflation are beginning to move down,” George said, an observation based on conversations with contacts in her Midwest district. “So I’m comfortable beginning that stepped-down process ... I’d be happy to do 25s if I were there.”

George will retire right before the Fed's next meeting and will not participate in it.

But she added, “We still have upside risk to inflation. I don’t think I’ve reached a point where I think it is clearly falling. There are enough issues out there to say we have to guard against them.”

Fed Chair Jerome Powell, who tested positive for COVID-19 on Wednesday and is experiencing mild symptoms from the virus, said after last month's policy meeting that the inflation battle had not been won and that more rate hikes were coming in 2023.

 

 

 

 

Pakistan: IMF country report

International Monetary Fund (IMF) has released its Country Report on Pakistan after the Executive Board completed seventh and eight reviews of the Extended Fund Facility (EFF).

According to the IMF report, program implementation deteriorated after the completion of sixth review in February 2022. Amid a tense political landscape, programmed fiscal adjustment was undone and several key EFF commitments were reversed like imposition of Petroleum Levy (PDL) and grant of subsidies on petroleum products.

In June 2022, two Performance Criteria (PC) on net international reserves and the primary budget deficit requirements were not met, as well as three continuous PCs were missed.

Moreover, seven structural benchmarks were also not met. Analysts believe that fiscal deficit target of 4.6% of GDP was ambitious.

Recent floods in various parts of the country have caused major losses to human lives, infrastructure, and crops. According to Dr. Aisha Pasha, State Minister for Finance the initial estimates indicate that the losses caused by floods were close to Rs2 trillion (2% of GDP).

Considering this view, it is likely that Pakistan’s fiscal deficit will likely clock in between 6-7% of GDP for FY23.

It is also expected that IMF will consider the potential impact of floods and provide some relaxations especially if Pakistan continue to remain steadfast in implementation of reform agenda agreed with IMF.   

As per the IMF country report, Pakistan Government has recently taken major steps including the completion of prior actions that led to revival of the IMF program.

It is believed that the current political setup has taken unpopular steps recently in spite of increasing political noise. This helped Pakistan got two waivers on PCs and also brought IMF program back on track.

IMF also approved Pakistan’s request to increase the size of program by US$1 billion and extend the program till June 2023 instead of September 2022.

Waivers on PCs & extension in program tenure will provide the much needed support to the Pakistan economy.       

IMF has recommended Pakistan authorities to restore fiscal and debt sustainability, safeguarding monetary and financial stability and maintaining a market driven exchange rate.

IMF has projected GDP growth of 3.5% in FY23 with Current Account Deficit (CAD) of 2.5% of GDP (US$9 billion) and CPI inflation of 19.9%.

It is anticipated that GDP growth will be in the range 2.5% to 3.5% in FY23. Current Account Deficit is likely to remain less than 3% of GDP. 

Though, it is early to estimate the potential impact of floods on current account but risk to upward revision in current account estimate remain (close to around US$1 billion) depending upon the crop damage and the demand to meet required demand through imports.

It is also believed that pressures on current account due to crop damage could also be somewhat compensated through: 1) economic slowdown and lower demand for imports, 2) higher remittances due to flood support from expats, and 3) increased aid and financial assistance from international community.

As per IMF, gross external financing requirement for FY23 is estimated at US$31 billion and available financing is projected at US$33 billion for FY23 as against SBP’s target of US$37 billion for FY23.

Analysts believe any additional financing requirement due to higher current account could be compensated through increased foreign aid and financial flows to the country.

On the monetary front, keeping in view the recent inflationary trend (CPI Inflation of 27.3% in August 2022) and the outlook on food prices post floods, it is likely that average inflation will also cross IMF estimate of 20%.

CPI inflation is likely to remain below 24%, keeping in view the extent of damage from recent floods and potential economic slowdown.

Analysts do not expect any further hike in interest rates in 2022. In fact, it is expected to start falling from 4QFY23.

United States GDP falls for second straight quarter

Economy of the United States appeared to shrink for the second consecutive quarter, according to federal data released Thursday, amid growing concern the country could be slipping into a recession.

US gross domestic product (GDP) shrunk between April and June, the Commerce Department reported, marking the second-straight quarter of economic contraction.

GDP fell at a yearly pace of 0.9% in the second quarter, according to the Commerce Department’s first estimate of economic growth over the previous three months.

“The US economy is struggling,” Scott Hoyt, senior director at Moody’s Analytics, wrote in a Thursday analysis.

“We now expect growth to struggle to reach potential both this year and next. However, we don’t believe the economy is in a recession,” he continued.

Many economists expected GDP to fall for a second consecutive quarter as the economy faced more pressure from high inflation, rising interest rates, slowing job growth, falling home sales and other headwinds. 

While the economy was almost certain to slow after growing 5.7% in 2021, experts have become more fearful of the US slowing into a recession after GDP fell at an annualized rate of 1.6% in the first quarter.

Two straight quarters of negative economic growth have long been used as a rule of thumb to determine when the US is in recession and is the formal threshold for a recession in other countries. But economists in the US consider a broader range of data when determining if the US is in recession.

“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the US economy, but the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession at this point,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association, in a Thursday analysis.

A steep decline in business investment and a 3.1% surge in imports, which detract from GDP in calculations, were the two major forces behind the second quarter decline.

 “The data fits with our view that the rate of US economic growth will slow noticeably this year, as households and businesses grapple with record high inflation and a steep rise in interest rates,” Cailin Birch, a global economist at the Economist Intelligence Unit, said in a Thursday analysis.

President Biden and White House officials have tried to convince Americans that the US economy is not yet in a recession thanks to a strong job market. They’ve focused heavily on the NBER’s definition of a recession to show Americans that the economy is not as weak as it may seem.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation. But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” Biden said in a Thursday statement.

Republican lawmakers were quick to release their own declarations of recession. They blamed Biden for driving the economy into ruin and accusing the White House of trying to dupe the American people.

“As Biden and his Democrat allies in Congress busy themselves with changing the definition of a recession, Americans continue to shoulder the burden of troublesome economic conditions,” Rep. Blaine Luetkemeyer, the ranking member on the House Small Business Committee, said in a Thursday statement.

The Federal Reserve is likely to keep boosting interest rates as inflation rises, which will continue to slow the economy, as the war in Ukraine and pandemic-related supply chain challenges threaten to make inflation worse.

 “Whether the economy meets the conventional or formal definition of recession is in many respects immaterial. Either way, households and firms are reeling from combined energy, inflation, and rate shocks that have damped individuals’ purchasing power and are in the process of reducing household living standards,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM.

“That is the toll levied by the inflation tax and is why it is critical to restore price stability to the economy as soon as is reasonably possible,” he continued.

 

Pakistan: Business leaders term hike in interest rate ‘disastrous for fragile economy’

According to a Dawn newspaper report, the business community of Pakistan has strongly condemned the decision of the State Bank of Pakistan (SBP) to increase the interest rate to 15%.

Trade and industry representatives said the move would prove highly disastrous for industries and the SME sector. They demanded that the government intervene and get the central bank’s decision withdrawn with immediate effect.

Irfan Iqbal Shaikh, President, Federation of Pakistan Chambers of Commerce and Industry (FPCCI) said he did not understand SBP’s logic in raising the interest rate to 15% at a time when power, gas and petroleum prices, along with looming uncertainty, have already reached new highs.

“The interest rate in Pakistan is three to four times higher than in the region, and in such circumstances, no stakeholder would dare to set up any new industries or go for any vertical expansion of their units,” he said.

“It seems that the government is more focused on dealing with political issues rather than showing any seriousness in tackling the issues of the business community. No planning is being done while the economic situation is getting out of control,” said Shaikh.

FPCCI President urged the government to listen to stakeholders and implement policies that will help the country recover from its economic crisis.

Abdul Rasheed, President, Site Association of Industry (SAI) said while the industry was already perturbed over the interest rate, the SBP has continued to crawl up the policy rate, bringing more trouble in the functioning of the industries.

He said many industries, including the textile sector, have invested billions of dollars in importing machinery in the last three years at a 4 to 4.5% markup rate after obtaining loans from the banks. At the 15% policy rate, industrialists and exporters would stop importing machinery, leading to a suspension in industrial activities besides creating unemployment and a law and order situation.

Muhammad Idrees, President, Karachi Chamber of Commerce and Industry (KCCI) said the SBP has increased the policy rate under some pressure, which would plunge many industries into a default situation. “The government can make borrowing, but the industries will be unable to take loans,” he added.

“What is the government doing? Will it put the economy on track by taking such decisions? “deplored Ijaz Khokhar, Chief Coordinator, Pakistan Readymade Garments Manufacturers and Exporters questioned the rationale.

“In Sialkot alone, a huge cottage industry (SMEs) comprising around 7,000 small units has been in operation for a long time. So they all would be no more gradually due to the increase in the interest rate at 15% which is already too much higher than our neighbouring countries,” he explained.

In a statement, Haris Ateeq Vice President, Lahore Chamber of Commerce & Industry (LCCI) also condemned the decision, expressing concern that further increases in discount rates would raise the cost of doing business.

 

 

Pakistan Stock Exchange witnesses return of feel good factor

The feel good factor returned to Pakistan Stock Exchange (PSX). The benchmark index gained 345 points during the week to close at 44,822 level on Friday, up 0.8% WoW. Rising hope of revival of IMF program and civil-military leadership reaching consensus over the appointment of new ISI chief fueled the market performance.

Commercial Banks emerged as the outperformers during the week amid increased likelihood of further rate hikes in the upcoming Monetary Policy Announcement, gaining 3.6%WoW, followed by Pharmaceutical and Cement sectors, up 2.0%WoW and 1.6%WoW respectively, owing to revision in prices. Participation during the week improved with average daily traded volume rising to 342 million shares, from 266 million shares traded a week ago. Cement prices increased by Rs45/bag to Rs710/bag whereas Automobile sales jumped 68%YoY to 82,000 units.

Other major news flow during the week included: 1) GoP agreeing to withdraw GST exemptions worth Rs334 billion in order to revive IMF program, 2) Country receiving US$8 billion in remittances during 1QFY22, up 12.5 percent, 3) Country retiring foreign Sukuk worth US$1.0 billion, 4) Cotton prices surging to Rs14,500 per mound in local market, 5) Expats invested US$2.4 billion in RDA and 6) ENGRO announcing plan to invest up to US$1.8 billion under petrochemical policy.

Top performers of the market were: GATI, ABL, FFBL, HBL, and LOTCHEM, while laggards included: HASCOL, KAPCO, ANL, TRG and JLICL.

Top volume leaders included WTL, UNITY, TELE, TREET and HASCOL.

Flow wise, Insurance remained the major buyers with (net buy of US$12.2 million) followed by Mutual Funds (net buy of USD3.4 million) while Companies stood on the other side with (net sell of US$3.3 million) followed by Individuals (net sell of US$3.2 million).

With the onset of the result season, the market performance will be dictated by the corporate profitability where analysts expect the earnings to grow. Furthermore, the formal announcement of the new ISI head will also help settle jitters on the bourse.

The GoP is also under negotiations with IMF to revive its plan and any developments on the hike in energy tariffs and withdrawal of tax exemptions will also be closely tracked.

Market participants should look to invest in the Banks where possibility of further interest rate hikes could bring the sector into limelight. Major result announcements during next week include PTC, SSGC, PABC and UBL.

Pakistan Stock Exchange witnesses return of feel good factor

The feel good factor returned to Pakistan Stock Exchange (PSX). The benchmark index gained 345 points during the week to close at 44,822 level on Friday, up 0.8% WoW. Rising hope of revival of IMF program and civil-military leadership reaching consensus over the appointment of new ISI chief fueled the market performance.

Commercial Banks emerged as the outperformers during the week amid increased likelihood of further rate hikes in the upcoming Monetary Policy Announcement, gaining 3.6%WoW, followed by Pharmaceutical and Cement sectors, up 2.0%WoW and 1.6%WoW respectively, owing to revision in prices. Participation during the week improved with average daily traded volume rising to 342 million shares, from 266 million shares traded a week ago. Cement prices increased by Rs45/bag to Rs710/bag whereas Automobile sales jumped 68%YoY to 82,000 units.

Other major news flow during the week included: 1) GoP agreeing to withdraw GST exemptions worth Rs334 billion in order to revive IMF program, 2) Country receiving US$8 billion in remittances during 1QFY22, up 12.5 percent, 3) Country retiring foreign Sukuk worth US$1.0 billion, 4) Cotton prices surging to Rs14,500 per mound in local market, 5) Expats invested US$2.4 billion in RDA and 6) ENGRO announcing plan to invest up to US$1.8 billion under petrochemical policy.

Top performers of the market were: GATI, ABL, FFBL, HBL, and LOTCHEM, while laggards included: HASCOL, KAPCO, ANL, TRG and JLICL.

Top volume leaders included WTL, UNITY, TELE, TREET and HASCOL.

Flow wise, Insurance remained the major buyers with (net buy of US$12.2 million) followed by Mutual Funds (net buy of USD3.4 million) while Companies stood on the other side with (net sell of US$3.3 million) followed by Individuals (net sell of US$3.2 million).

With the onset of the result season, the market performance will be dictated by the corporate profitability where analysts expect the earnings to grow. Furthermore, the formal announcement of the new ISI head will also help settle jitters on the bourse.

The GoP is also under negotiations with IMF to revive its plan and any developments on the hike in energy tariffs and withdrawal of tax exemptions will also be closely tracked.

Market participants should look to invest in the Banks where possibility of further interest rate hikes could bring the sector into limelight. Major result announcements during next week include PTC, SSGC, PABC and UBL.