Stock Review

PSX remain under pressure due to high trade deficit coupled with depreciating Rupee

Pakistan stock market started the week ended on 10th September 2021 under pressure. Investors awaited MSCI’s decision of downgrading Pakistan to Frontier market status from Emerging Market, resulting in selling in some index heavy stocks. Additional pressure was evident on the market due to high trade deficit for August 2021 coupled with depreciating Rupee. However, on fourth and fifth trading day of the week, market rebounded, led by technology sector and recovered almost all the losses for the week. The benchmark index closed at 47,198 level, up 0.51%WoW.

Cement sector was among the major laggards for the week, losing 2.6%WoW as coal prices traded near 10-year high amid increased demand for power generation in developed economies. Moreover, government providing additional power to officials to monitor and control the prices of fifty categories of product including cement, steel also caused jitters among the investors, resulting in engineering sector losing 2.6% during the week. Refinery sector also remained among the laggards due to the delay in approval of Refinery Policy. However, it has been included in the agenda for next week’s CCOE’s meeting where an approval can be a significant trigger for the sector.

Other major headlines during the week included:1) Cement sales growing by 23%YoY to 4.4 million tons for August this year, 2) Trade deficit widening by 119.94%YoY in 2MFY22 to US$7.5 billion as compared to US$3.4 billion during the same period last year, 3) MSCI announcing to reclassify the Pakistan to Frontier Markets from Emerging Markets, 4) Foreign exchange inflows through Roshan Digital Account (RDA) reaching US$2.1 billion in 11MFY21 and 5) The GoP starting the audit of all oil refineries and oil marketing companies (OMCs).

Top performers of the week included: PSEL, FABL, AGP, NESTLE and BNWM, while laggards included: EPCL, GATI, SCBPL, HCAR and HGFA.

Flow wise, foreigners remained net sellers with an outflow of USD18.6 million, followed by Banks/DFIs with a net sell of USD3.76 million. As against this, Individuals remained on the buying side with a net buy of USD12.8 6million. Volume leaders during the week were: TPL, TELE, GGL, WTL and ANL.

The market is likely to continue the momentum attained in the last few trading sessions, technology sector is expected to remain in limelight while additional interest can be witnessed in stocks added to MSCI list. After being downgraded to Frontier markets, next big checkpoint remains IMF Board’s approval of next review where a successful review can bring optimism in the market. Analysts continue to advocate building positions in thematic plays such as in Cements, Steel, and Construction-Allied, and Textiles.

A move that was widely anticipated, MSCI has officially downgraded Pakistan to MSCI FM index from MSCI EM index, an end to country’s 4 years long stay in the EM index. The decision was announced in the early morning hours and followed feedback received from market participants over reclassification. The transition to FM index from EM will be a one step process and will coincide with November 2021 Semi-Annual Index Review (SAIR). Simulated results show that this would lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.90%. Market dataflow suggests that total AUMs in EM currently reported at US$1.8 trillion whereas the total AUMs of FM currently stands at US$15 billion. Therefore, given the weight Pakistan had in EM and likely weight it will have in FM, the net outflow may rise to US$80 million. Further flows may be unlocked upon classification in MSCI FM 100 index and 15% Country Capped Index. Market might witness a knee-jerk reaction in the immediate aftermath of the classification but the reclassification comes with a potential silver lining owing to Pakistan’s increased weight in FM index (1.9%) and FM100 index (5.5%) as opposed to a cumulative weight of 2bps in MSCI EM index. Once the early jitters subside, the benchmark may post a solid price performance on the back of strong fundamentals.

Local cement dispatches for the month of August 2021 were reported at 3.8 million tons, up 37%YoY and 11%MoM where low base effect played its part as COVID-19 related restrictions kept the base low for August 2020, while for July 2021, low number of working days due to Eid holidays played a part. Overall 8MCY21 local dispatches increased by 21%YoY to 32 million tons exports increased by 8%YoY taking total dispatches for 8MCY21 to 37 million tons, up 19%YoY. A number of factors have converged to send coal prices to a 10 year high. Decreasing gas prices in Europe provided hope of a decline in coal prices. Hurricane Ida has caused a storm in energy markets, adversely affecting LNG supply hence pushing coal prices even higher. Even though sector has remained under pressure recently due to increasing coal prices, analysts expect the sector to come back into limelight in 2QFY22.

As reported by PAMA, auto sales were down 13%MoM, but up 85%YoY to 21,751 units. On MoM basis, car sales were down due to high base as Indus Motors (INDU) and Pak Suzuki (PSMC) recorded highest ever monthly sales in July 2021 due to announcement of incentives in budget and strong demand backlog.

Honda Atlas (HCAR) sales were up 40%MoM to 3,230 units in August 2021 amid launch of its new model Honda City during the month.

Hyundai Nishat posted growth of 53%MoM due to strong demand of its recently launched cars Hyundai Elantra and  Sonata.

Car sales were up 85%YoY in Aug 2021 led by economic recovery, low interest rates and launch of new models. In 2MFY22, car sales increased by 87%YoY to 46,669 units.

Bike sales as reported by PAMA were up 2%MoM and 5%YoY to 148,000 units. ALTH sales were up 18%YoY to 100,000 units in August 2021.

Trucks and buses posted 27%MoM decline, but up 54%YoY as transportation activity picked pace and lockdowns eased in August 2021 as compared to last year.

Tractor sales were up 17%YoY, but down 23%MoM to 3,316 units. MTL sales were down 9%YoY and 31%MoM respectively.

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