Stocks get off to a lively start in 2020; geopolitical concerns, SBP decision may dominate
Meeting the New Year on an exuberant note, with market expectations of economic stability crystallizing, the benchmark index of Pakistan Stock Exchange (PSX) closed at 42,323 points, up 3.6%WoW for the week ended 3rd January 2020. Average daily traded volume was 23% to 281 million shares. Based on NCCPL data, foreigners were sellers with US$7.3 million. The total liquid foreign reserves of Pakistan were reported at US$18,081.4 million on 27th December 2019. The break-up was: reserves held by the State Bank of Pakistan (SBP) amounted to US$11,489.4 million and net foreign reserves held by commercial banks were at US$6,592.0 million. During the week under review, reserves held by the central bank increased by US$582 million to US$11,489.4 million. This increase is attributed to bilateral and multilateral inflows including proceeds of US$ 452.4 million received from International Monetary FUND (IMF) under EFF program.
On the local side, Mutual Funds and Banks were net buyer of US$8.6 million and US$4.2 million. Major news flows during the week included: 1) the GoP through a Presidential Ordinance introduced significant changes to tax laws to implement concessions promised to traders, reduce duty on import of low-value mobile phones, remove limit on inter-corporate dividend tax relief and penalize currency smugglers, 2) The GoP increased fuel prices for January 2020 by approving the recommendations made OGRA, 3) FBR collected Rs2,080 billion during the first six months of the current financial year, as against the target of PkR2,198 billion projected for the same period and 4) NEPRA increased KEL’s tariff by 38% under quarterly adjustment formula.
Top performers of the week included: LUCK, PAEL, FFBL, PSO and ASTL. Volume leaders during the week included: TRG, UNITY, KEL and PAEL. Average daily traded volume was 23% to 281 million shares. Based on NCCPL data, foreigners were sellers with US$7.3 million. On the local side, Mutual Funds and Banks were net buyer of US$8.6 million and US$4.2 million.
Geopolitical concerns are expected to dominate headlines overt the coming week, where the US decision to target senior Iran military leaders in Iraq early Friday, have already rattled crude markets (Brent/WTI up US$2.6 and US$2.4 per barrel respectively. As global market activity picks up and the mid January 2020 Monetary Policy decision will take center stage, some consolidation is likely in the weeks ahead.
Breaking the cycle of two consecutive years of decline, the benchmark index of Pakistan Stock Exchange gained 9.9% during CY19, posting a V-shaped recovery, in the backdrop of successful structural reforms (Tax revenues, up 16.95%YoY to Rs2.058 trillion in 1HFY20, CAD contracting by 73% to US$1.8 billion in 5MFY20).
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Sector heavy-weights, Banks were the star performers, up 12.0% in CY19) on account of monetary tightening and foreign interest in the sector (net buy US$68.9 million in total FIPI net buy of US$55.7 million), whereas E&P sector closed flat as initial euphoria in relation to offshore exploration died down and falling oil prices (Arab light down 8%YoY).
Going into CY20, FATF related news flows, stringent compliance requirement particularly on fiscal side under the IMF program, the pace and timing of monetary adjustments, and geopolitical factors hold the key in determining market direction.
Local cement sales for December 2019 increased by 7.3%YoY, despite both the regions witnessing opposite trends. Sales in Northern region increased by 13.0%YoY, while Southern region declined by 15.2%YoY. For 1HFY20, total dispatches increased by 6.6%YoY where major growth was witnessed in exports, up by 23%YoY, followed by 3.7%YoY rise in local dispatches. Growth in dispatches can mainly be attributed to government releasing bulk of development expenditures allotted for 1HFY20, while resumption of private sector construction along with pre-buying before CNIC conditions are re-imposed from January 2020. On the back of weakening demand, cement prices have also come down by up to maximum Rs80/bag in the North. Analysts expect weakness to continue particularly as 4.7 million tons of new capacities will come online prompting pricing indiscipline. Analysts expect pressure on cement sector to continue keeping in view weakening sector dynamics and potential weakness in 3QFY20 profitability.
As per details released by NFDC, Urea offtake declined 23%YoY to 380K,0000 tons in November 2019, while showing recovery on a sequential basis. This takes 11MCY19 urea offtake to 4.8 million tons, down 4% YoY. The ending inventory was reported a 1,041 tons in November 2019 as against 245,000 tons in November 2018. Company-wise, Urea offtake declined across the industry with EFERT/FATIMA witnessing lowest/highest decline. DAP offtake, on the other hand, increased 53/49% YoY/MoM in November 2019, containing the 11MCY19 DAP offtake decline at 10%. In line with the 11MCY19 offtakes, analysts have revised down urea offtake assumptions for, with limited improvement in following years, backed by our expectation of continued operations of LNG based plants in medium term. We believe sector’s price performance will remain a function of: 1) demand supply situation, 2) pricing power amid potential gas price hikes and 3) Supreme Court’s ruling on the GIDC scenario.