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Budget related news keep investors at bay

After an exuberant week, Pakistan Stock Exchange (PSX) started the week with same enthusiasm. However, the benchmark index failed to sustain that level as investors started booking their gains in later sessions. The market closed on 4th June 2021 at 48,212 points, up 2.3%WoW. The average weekly trading volume in KSE-100 declined to 1.12 billion shares, down 9.4%WoW.

The overall investors’ sentiments remained positive on account of improving macroeconomic indicators where government’s continued support to construction sector resulted in engineering sector being among the leaders with a performance during the week. Meanwhile, refinery sector performed; up 6.1% during the week as news report suggest new policy for the sector is in its final stages. The week also included some key economic data releases where FBR surpassed its May collection target by 8%, inflation clocking in at 10.9%, petroleum sales at all-time high of 1.7m tons, up 14%YoY and exports posting a growth of 14%YoY.

Other news flows during the week included: 1) Ministry of Finance likely to pay the first installment of Rs90 billion to 35 Independent Power Producers (IPPs) including Hubco and Kapco, 2) approval of US$130 million for vaccine procurement, 3) Pakistan and the Russian Federation signing the amended Inter Governmental Agreement for North South Gas Pipeline (NSGPP) of 1,122 kilometers from Port Qasim Karachi to Kasur in Punjab and 4) GoP planning to abolish about two dozen withholding taxes.

Stock wise top performers included: PTC, PSMC, HCAR, HASCOL, and PSX, whereas the laggards were: KEL, JLICL, MTL, BAHL and FATIMA. Flow wise, individuals remained the major buyers with a net buy of US$11.05 million followed by mutual funds (net buy US$4.61 million), while insurance stood on the other side with a net sell US$11.95 million followed by brokers (net sell US$6.17 million).

For the upcoming week, all eyes will be set on FY22 Federal Budget, expected to be announced on 11th June 2021. However, budget related news item can keep the market volatile during the week. Moreover, Refinery, Automobile Assembler and Automobile Parts and Accessories sectors will have particular attention with refinery and auto policy expected to be announced with/around budget. Construction and allied sectors are also expected to continue garnering investor interest with development budget expected to be increased while government continues its support to construction sector.

The month of May 2021 closed at 47,896 points, with KSE-100 index gaining 8.1% – the highest monthly gain in 9 months. Investors preferring to remain sideways in the earlier part of the month, returned to the bourse after extended Eid holidays and significant curtailment in COVID-19 cases, rejoicing positive inklings on the macro front. Within sectors, Engineering and Cements gained 18.1%MoM and 12.3%MoM respectively on expectation of FY22 budget likely favoring these sectors. OMCs gained 14.3%MoM on the back of potential release of first tranche by Government by the end of the week to clear circular debt, whereas activity was also seen in the E&P sector after GoP shelved stake sell in OGDC and PPL. Flow wise, foreigners cumulatively sold US$43.4 million, whereas excluding BYCO transaction where sponsor divested their holdings, net sell of US$7.4 million. Mutual Funds and Banks also followed the suit with net sell of US$7.4 million and US$4.7 million respectively. However, the selling was absorbed primarily by Individuals and Others with a cumulative net buy of US$43.2 million. KSE-100 index is expected to continue its bull run boosted by liquidity flush currently prevailing in the market. As such, analysts advocate for sectors that fall on structural theme metrics (likely to also remain in favor in the upcoming budget). The preferred sectors are Cements, Steel, and Construction-Allied on construction theme and Power and selected OMCs on payment in lieu of circular debt resolution.

Oil prices have picked momentum, with Brent surpassing US$70/bbl, where subsiding COVID’19 cases in India (down to 40% of third wave’s peak) acted as a catalyst. Oil demand recovery by 6.0 million bpd in CY21 is likely to be sufficient to absorb additional supply by Iran post potential lift-off of US sanctions, and as OPEC adds 25% of pre-COVID’19 production over May-July 2021. While earnings remain accretive for the E&P sector, surge in oil prices is also prescient of worsening circular debt accumulation for the sector. OGDC remains the top pick. From macro vantage, surging oil prices will have a twofold impact on economic metrics where a US$5/bbl change in our oil assumption (US$65/bbl for FY22) translates into: 1) US$1 billion negative impact on current account balance, 2) a 30bps surge in monthly inflation estimate. Privatization sword back in sheath would allow some price performance in E&P space, which together with expectation of pro-growth policies in the upcoming budget, should stretch the recent bull-run in the market.

OMC volumes remained on an upward trajectory with an increase of 14%YoY for May’21 on the back of strong economic rebound post COVID-19 related slowdown and stand at 1.7 million tons, while sequentially, volumes grew by one percent. Overall, OMC sales continued on a strong footing, up 19%YoY for 11MFY21 (up 15%YoY excluding FO). The seasonal uptick in FO demand for power generation over the period drove growth of 46%YoY while MS/HSD followed with growth of 13% and 19%YoY. Market shares remain fluid with PSO/APL/HASCOL/SHEL accounting for market shares of 45/8/3/8% during May 2021 where a comparison with May 2020 reveals decreasing share of HASCOL/APL by 5/1ppts while market share of PSO increased by 3ppts. PSO emerges the top pick on the near term developments that include clearance of circular debt and shift in profile of cash flows due to increased share of retail fuels, while focus on improving storage infrastructure will result in the Company sustaining the recently gained market share, moving forward.

PSO has posted a phenomenal growth in volumes, outperforming the overall sector with an increase in volumes of 27%YoY for 10MFY21 against 19% of the industry, while retail fuel volumes has increased by 27.5%YoY against 17.3% of the industry. The GoP has provided final clearance to first tranche of circular debt clearance. PSO is expected to receive Rs3.1 billion in cash while Rs6.2 billion in shape of Sukuk/PIBs. However, expectations of significant cash payout depend on the Company receiving late payment surcharge.

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