Stocks continue gloom-ridden venture
Moving along the trend set in motion in previous week, Pakistan Stock Exchange posted negative performance throughout the week. On last trading day of the week ended on 24th September 2021, bench mark index closed at 45,073 points, touching a low of 44,788 points. Over the outgoing week, the index cumulatively lost 1,562 points or 3.4%. A 25bps hike in interest rates by the central bank suggests further hikes in future.
Other major news flows during the week included: 1) the central bank tightening regulations on consumer financing and mandating banks to share 5-day import payments schedule, 2) the GoP considering re-imposing higher regulatory duties to curb auto imports, 3) Petroleum division proposing to increase gas prices by up to 35 percent, 4) Pakistan planning to issue international Sukuk in October 2021 to raise US$1.5 billion and 5) EU extending GSP+ status for Pakistan with six new conventions.
Volumes relatively dried up with average daily turnover sliding to 383.5 million shares as against 400.1 million shares a week ago. Major activity tilted towards main board items. Pressure was witnessed across sectors, with Engineering hit the most, registering a decline of 6.3%WoW followed by Auto Assemblers, down 5.9%WoW. Refineries emerged the worst performer (down 17.2%) over uncertainty on refinery policy. The resignation of SAPM Tabish Gauhar, the architect of the Policy, hints towards possible delays in finalization of the Policy.
Flow-wise, Foreigners and Others played a major role in absorbing selling pressure by other participants, with cumulative net inflow at US$12.6 million, while Individuals and Companies cumulatively squared US$11.0 million positions. The major gainers were: HMM, PSEL, SCBPL, ARPL and SNGPL, while laggards were, ANL, ATRL (down 17.9%WoW), BYCO, PAEL and BNWM.
Market is likely to remain volatile in the near term, direction to be determined by IMF review. Reversing certain incentives such as in the case of Autos should be viewed as material positive particularly from a macro perspective, easing pressure on external account. Moreover, investors should adopt a top-down approach to investing where possibility of further interest rate hikes could bring Banking Sector into limelight, while Techs and Textiles (on currency depreciation where stronger earnings are yet to be priced in) are other sectors of interest. Techs may remain under pressure owing to structural impediments faced by one of the companies. The weakness should be taken as an opportunity to accumulate.
In the latest meeting, the Monetary Policy Committee (MPC) of the SBP announced a 25bps hike in policy rate to 7.25%. The decision was driven by the recommendation of Asian Bank to begin tapering off accommodative policies as the country’s economic recovery becomes more entrenched. The SBP noted that demand-side pressures have become more noticeable since the last MPC where imports have surged 67.7%YoY in 2MFY22 to US$11.4 billion, flaring up concerns on external account and resulting in PKR/US$ parity depreciating by 4.6% since last MPC meeting. The rate increase was against market expectation of Status Quo. By announcing hike in interest rate the central bank has given credence to strong economic performance carrying through in FY22, suggesting gains achieved on external side are likely to remain intact, along with currency consolidating at current levels. With further monetary policy interventions not being ruled out, analysts expect return of interest in Banks. IMF review would be the key near-term checkpoint for market’s performance, while analysts advocate building positions in Techs and Textiles.
Local auto manufacturers have been increasingly halting new bookings with Kia motors being the latest inductee in the club, notifying dealers to draw down the booking for Picanto and Sportage. The semi-conductor chip shortage has been one of the factors cited for the change in operational dynamics of local OEMs. Halt in new bookings also signals robust demand for new vehicles — strengthening prospects for the sector. This is also vetted by growth in auto sales jumping 93%YoY in 2MFY22 and auto loans hitting Rs326 billion (up 27% CYTD). Analysts expect volumes to reflect low-altitude in the near term, only to recoup later as input shortage ease and business dynamics improve. The GoP is considering increasing Regulatory Duty (RD) on imported CBUs from 15% to 50% to contain the massive increase in current account deficit while revised financing regulations have already been communicated by the SBP. The revised regulations are likely to be positive for local OEMs with PSMC gaining the most given stronger competition from imported CBUs whereas sales in 1300CC+ premium segment are unlikely to be materially impacted. While recent developments are likely to be margins decretive, OEMs with strong pipeline of new models and a consequent gain in pricing power and healthy cash flow profile are likely to fare better.
2021 marks significant regulatory changes in China under the banner of “Common Prosperity Initiative”, targeting companies in Tech space, Real estate, and Education. The negative near-term implications from such regulatory actions have become more visible lately with Evergrande calling for debt-restructuring facing a possible default threat. Financial distress at Evergrande has brought jitters in Emerging Market bonds. Fortunately most of the impacts are limited to Chinese real estate bonds, where contagion from fall-out appears far-fetched. However, it compounded existing weakness precipitated by expected stimulus tapering by US Fed. Beijing is due to host Winter Olympics in February 2022 in the back drop of expected climate curbs in the regions close to event sites — on a scale much larger than seen in 2008 Beijing Summer Olympics. Major industries which are likely to be impacted are: Steel and Aluminum producers, Refiners, and Coal miners. From Pakistan’s vantage, volatility shall persist in EM bonds space in the near term, possibly resulting in local authorities realizing higher yields on planned up to US$1.5 billion Sukuk issuance in October 2021, to retire US$ one billion bond. That said, possible downward revision in certain commodities is materially positive for local steel players. For Cements, coal prices are likely to remain elevated in the near term. However, lack of future investments in coal power plants by China is material positive.