Market likely to remain range-bound in short term
During this past week ended on 26th June 2020, Pakistan Stock Exchange (PSX) remained under pressure due to a disappointing budget, providing incentives only to a few sectors against investor expectations of broad-based relaxations. The news of the week was reduction in interest by 100bps. At its meeting on 25th June 2020, the Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) decided to reduce the policy rate by 100 basis points to 7%. This decision reflected the MPC’s view that the inflation outlook has improved further, while the domestic economic slowdown continues and downside risks to growth have increased. Against this backdrop of receding demand-side inflation risks, the priority of monetary policy has appropriately shifted toward supporting growth and employment during these challenging times. Consistent with its mandate, the MPC re-asserted its commitment to supporting households and businesses through the COVID-19 crisis and minimizing damage to the economy. The MPC felt that from a risk management point of view, a prompt response to downside risks to growth was called for given the improved inflation outlook. In addition, the MPC noted that with approximately Rs3.3 trillion worth loans due to be re-priced by early July 2020, this was an opportune moment to take action from a monetary policy transmission perspective. In this way, the benefits of interest rate reductions would be passed on in a timely manner to households and businesses.
Major news flow driving market sentiment included: 1) Prime Minister announcing that the lockdown would be further softened but the hotspots will face strict lockdown, 2) Pakistan’s textile and clothing exports tumbling for the third consecutive month in May 2020, falling 36.5%YoY, 3) Government unlikely to extend subsidy on urea due to lack of implementation mechanism at least in three provinces, 4) Gas companies seeking a surge in gas tariff and 5) Baluchistan National Party-Mengal (BNP-M) announcing its decision to quit the ruling coalition at the centre ahead of the vote on the federal budget.
With spread of COVID-19 becoming severe every day and news of strict lockdown circulating, the market is expected to remain range-bound in short term where political noise is only going to increase pressure, particularly as government looks to get the finance bill passed. From next week, market will also start looking towards inflation number for June 2020 where a low number can propel hopes of further cut in interest rate.
Assessing major index oscillations during the soon to conclude FY20, analysts highlight the large underperformance of KSE-30 index as an illustration of high market capitalization sectors undergoing significant headwinds. In terms of volumes, brisk rise in average volumes across indices can be seen supporting futures and ready market value as well, with cheap valuations the likely driver of momentum in main-board names. Additionally, the general “flight-to-safety” sentiment underpins increasing prominence of KSE100 and KSE-30 volumes in the share of all stock volume over the period. In the backdrop of emergent macro risks propelled by COVID-19 pandemic and pricing the uncertainty of a waning economic outlook, analysts believe mean reversion is likely to play out over the medium term, with blue chip plays seeking to revamp profitability outlooks. Any upward momentum in global crude prices, coupled with external pressures forcing PKR depreciation could drive E&P sector performance. Reiterating our outlook for technology and pro work from home plays taking a lead during the short term, Banks in the main-board offer attractive valuation based upsides as well.
Pakistan’s leading brokerage house, AKD Securities has assessed the impact of long running operational impediments on the energy chain, particularly on OMCs, while quantifying anticipated volumetric slowdowns from the COVID-19 pandemic and delayed margin revision for FY21 in weakening profitability, indicating possible room for re-rating in the space. In a nutshell, COVID-19 and ensuing curbs to industry, business activity, individual movement and transport restrictions only exaggerated the effects of long term forces, where inadequacy of refining infrastructure in ramping MS yields have forced OMCs to source through imports. Mapping stock price moves for PSO/APL since COVID-19, the brokerage house has highlight possible under-pricing of volumetric growth, with expected inventory losses the likely culprit of investor apathy. POL product volumes have shown to rebound at a fast clip globally, a trend confirmed in Pakistan, with daily average MS sales for June 2020 are already up by 42/30% against June 2019 and May 2020.
The review of Federal Budget FY21 appears an exercise in frailty where the need to provide COVID-19 related relief measures appears held back by IMF mandated austerity requirements. Government targets FBR revenue at Rs4.96 trillion, which appear ambitious and unlikely to be achieved. The GoP appears to bank on administrative measures to fuel tax collection, where several steps to this end have been announced. From capital market perspective, Budget FY21 was anti-climactic and can be characterized as a ‘Construction sector Budget’. Focus will now shift towards August and September, the period of expected peak COVID-19 transmission and its fallout on wellbeing – both economic and healthcare. Analysts see the benchmark index trickling to 39,000 over the next one year; with limited upside by already justified valuations. In the worst case, assuming an aggressive and prolonged slowdown throughout 1HFY21, the index may witness further fall.
At the same time, with Pakistan becoming more entrenched globally, events shaping in the United States and other Emerging Markets will have major bearings on the KSE-100. Major near term US events to watch out for include: 1) FED decisions on interest rate cut and further stimulus), 2) November 2020 elections and 3) movement of the Dollar Index, particularly given current risk-off sentiment. At the same time, SBP decisions particularly any decision of further easing (potentially 100bps) may also dictate sentiment. Analysts believe improved valuations, courtesy interest rate reduction, have essentially placed a floor on market downside.