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Index surges amid profit-taking; positive momentum may prevail in near term

The benchmark Index of Pakistan Stock Exchange (PSX) closed the week ending on 4th February 2021 at 46,906 points, up 1.12%WoW amid volatile sessions, with heavyweight E&P sector supporting the Index, but profit-taking was witnessed in select scrips. E&P sector turned out to be the top performer during the week on rising oil prices and removal of dividend distribution cap on MARI.

Average daily trading volume for the week declined to 675.4 million shares, from 932.5 million shares a week ago. The key news driving the market included: 1) Pakistan beginning vaccination drive with first batch of 500,000 doses of Sinopharm vaccine arriving and AGP Pakistan securing Emergency Use Authorization (EUA) from DRAP for Sputnik V (COVID-19 vaccine), to be imported from Russia, 2) January 2021 inflation was contained at 5.7%YoY as compared to an increase of 8.0% in December 2020 and 14.6% in January last year, 3) local cement sales registering growth of 17%YoY to 27.65 million tons during 7MFY21 on the back of robust construction demand and 4) GoP announcing primary surplus of 0.7% of GDP during 1HFY21, similar to same period last year.

Apart from E&P, Power and OMCs amongst the main board items gained 3.1%WoW and 2.5%WoW respectively, on developments relating to clearance of circular debt. Amongst secondary boards, textile spinning gained 4.6%WoW on expectation of stronger results due to better margins on yarn in 2QFY21, followed by leather (up 4.1%WoW) and paper & board (up 3.1%WoW). Foreigners emerged the net seller during the week (US$2.73 million net outflow) together with mutual funds (net sell of US$1.96 million), which was mainly absorbed by Individuals (net buy of US$9.5 million) and companies (net buy of US$6.57 million). Top performers during the week included: GATM, MARI, PSMC, GSKCH, and CHCC, whereas laggards were: GHCL, HASCOL, GATI and INIL.

Market is expected to maintain positive momentum in the near term especially on account of successful vaccination drive, settlement of IPPs dues, and earnings season (key result announcements in the upcoming week include NPL, EPCL, MCB, CHCC, and ASTL). That said, some profit taking could be seen in selected scrips in the coming week where key developments to watch out for in the near term is the upcoming FATF Review by end of the month.

Local cement dispatches extended their outstanding run with an increase of 24%YoY to 4.0 million tons for January 2021. South fared better among the two regions, witnessing an increase of 25%YoY while North posted an increase of 23%YoY. Low base has led to sequential growth in exports of 10%. However, on YoY basis, exports declined by 14% where number of factors are at play including logistical issues and seasonality. The local players are also shifting their sales mix towards local market to take advantage of higher retention prices. With LUCK and ACPL formally announcing their expansion, analysts believe it to be a start of another expansion cycle where other players are expected to follow soon with capacity utilization expected to reach 85% by FY23. SBP is also proving concessionary financing under TERF. The picks of analysts continue to be MLCF and LUCK, with the former being one of the lowest cost producers implying lower sensitivity to retail price variations, while latter’s cost efficiencies coupled with diversified investments make it a safe play.

In line with historical trend, the benchmark index of PSX was up 6.0% during January 2021 and closed at 46,385 points, marking the third consecutive month of positive close. In the process, cumulative 7MFY21 return reached 34.8%. The top performing sectors included Tech, Power and Refineries. Investors’ sentiments remained buoyed on expectations of GoP closing agreements with IPPs as well as the SBP’s intent of keeping interest rates stable in the near term. By and large, expectations of a strong 4Q result season further provided impetus to bullish euphoria. Bucking historical trend, FIPI witnessed an outflow of US$1.8 million as compared to inflows in the earlier years. On the local front, Insurance, Banks and Brokers emerged as net sellers with a cumulative outflow of US$52.6 million. Selling was primarily absorbed by Individuals with a net buy of US$44.3 million. An anticipated strong 4Q result season, low inflation as well as kick start of COVID-19 vaccinations in the country are widely expected to keep the market sentiment bullish. That said, headwinds could include any adverse development in the February 2021 FATF review as well as any potential harsh conditions of the IMF program resumption.

Pakistan’s Fiscal Deficit was reported at 2.5% of GDP (Rs1,138 billion) for 1HFY21 as compared to 2.3% of GDP (Rs995 billion) for 1HFY20, translating into an increase of 14%YoY (in absolute terms) during 1HFY21. While the overall deficit is higher as compared to last year’s, the government has managed to keep Primary Balance at 0.7% of GDP (Rs337 billion), which is in line with pre COVID-19 IMF’s target. In 2QFY21, overall budget deficit has shrunk by 8%YoY. All the four provinces recorded budgetary surplus during 1HFY21, aggregating to a surplus of Rs255 billion. The government financed Rs454 billion (40%) of the overall deficit through net External Financing and Rs683 billion (60%) through net Internal Financing. Analysts expect Pakistan’s Fiscal Deficit to hover around at 8.0-8.5% of GDP in FY21 compared to 8.1% of GDP in FY20.

Total revenues were up 4%YoY, while total expenditures were up 6%YoY in 1HFY21. Current Expenditures have increased by 8%YoY during 1HFY21, where Mark-up Payments were up 15%YoY even though interest rates have sharply come down. Analysts believe this is largely owing to realization of coupon payments on PIBs sold during 1QFY20 and higher borrowing. Government Expenditures (minus Markup and Defense) increased by 8%YoY during 1HFY21. Development Expenditures and Net Lending were contained at Rs487 billion, down 3% YoY.

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