Bears rule, results and other news focus of attention
Reeling from the previous week’s dejected performance; Pakistan Stock Exchange (PSX) witnessed bearish sentiments throughout the week. The week ended on October 08, 2021, closed the benchmark index at 44,477 points, posting a decline of 395 points or 0.9%. An upsurge in global commodity prices (Coal hit US$238/ton and Brent hit US$83.1/barrel), widening trade deficit and higher inflation kept the investors’ sentiments subdued. In addition to these, the upcoming IMF review and political uncertainties also dampened investors’ sentiments.
Cement sector was among the top laggards for the week, losing 5.6%WoW as coal traded at near 10 year high prices amid increased demand for power generation in developed economies.
Participation during the week remained dull with average daily traded volume reported at 265 million shares as against 355 million shares witnessed during last week. Sector wise, CRC prices increased to Rs239,000/ton.
Other major news flow during the week included: 1) IMF asking Pakistan to take additional taxation measures in the shape of income tax, sales tax and regulatory duty, 2) GoP debt rising to Rs39.7 trillion (up11.5%YoY) in August this year, 3) Pakistan’s exports to Afghanistan falling sharply after Taliban takeover, 4) cement sales dipping by 6% in first quarter of current financial year, 5) Russia expressing intention to invite Taliban to international talks on 20th of this month, and 6) PSMC suspending bookings for Alto AGS, Cultus VXL and Cultus AGS.
Top performers of the market included MARI, SEARL, COLG, UBL and MTL. Meanwhile laggards were: NATF, PIOC, GADT, FFBL and CHCC. Top volume leaders included WTL, TELE, UNITY, GGL and BYCO.
Flow wise, Individuals remained the major buyers with (net buy of US$7.13 million) followed by Mutual Funds (net buy of US$3.61 million), while Companies stood on the other side with (net sell of US$16.05 million) followed by foreigners (net sell of US$3.7 million).
Market direction is likely to be determined by upcoming result season, geopolitical situation and most important IMF review, formal talks are expected to take place in the next week. The GoP appears to be formulating strict measures to increase tax base. Moreover, gas and electricity tariff hikes are on the cards as well. Market participants should look to invest in the Banks where possibility of further interest rate hikes could bring the sector into limelight. Techs and Textiles (on currency depreciation) and Cements (on easing coal prices) are other sectors of interest. To this end, major results in the next week include, EFERT, MEBL, EPCL and HBL.
Since State Bank of Pakistan raised Discount Rate by 25 bps in the last Monetary Policy announcement, yields on T-Bills have gone up, pointing to the burgeoning expectations of another policy rate hike before end CY21. The expectations of further hikes in interest rates have built up at a time when average book growth for local banks has been reported at 22%, one of the strongest in history. With headline growth in GDP likely to touch 5% mark in FY22, there is no immediate risk over buildup in NPLs in the short to medium term. Also, with average coverage ratio of our banking universe close to 98%, the provisioning costs are forecasted to remain low in the medium run. Lately, GoP made an amendment in the Finance Act, penalizing banks with lower Advance to Debt Ratio by levying higher tax rates on their income. While this is expected to push banks into growing their loan books, it could also potentially slow down deposit growth with greater emphasis put on cheap deposits. Despite a robust growth in profitability and healthy dividend payouts, banking sector has underperformed the index.
According to an AKD Reports, cement sales of its portfolio increase by 4.2%YoY for 1QFY22. Local cement dispatches for September 2021 were reported at 4.0 million tons, up 5.3%MoM, but down by 1.7%YoY. Both the regions witnessed a rather tepid month with North witnessing local sales of 3.5 million tons, while South witnessed local sales of 0.6 million tons (down 15.8%MoM). Overall, for 1QFY22, local sales increased by 4.2%YoY to 11.3 million tons, whereas local sales in North have remained flat at 9.5 million tons, while local sales in South have witnessed a significant jump of 30%YoY. With the coal prices trading at all-time highs, margins of local players are expected to remain under pressure, particularly when government authorities have raised concerns over previous increase in cement prices. To note, local players needs to increase prices by up to Rs60/bag in order to pass on the impact of increase in coal prices. Analysts expect the sector to continue to remain under pressure, offering a good opportunity to accumulate. With coal prices easing off and other fundamentals intact, the sector is poised for significant gains.
International cotton prices remained strong throughout 1QFY22, hovering around USc112/pound, posting an increase of 10%QoQ in 1QFY22 taking cumulative CYTD increase of 32.6%. Analysts expect international prices to ease in the coming months where potential higher production in key areas likely to offset increase in demand. Cotton prices have started receding, down 4%MoM to around Rs14,393/maund but still at historically highest levels. However, the recent arrival of 3.85 million cotton bales for the mills use casts positive overtures on cotton production outlook where the current production target is set up to 9.0 million bales for FY22. The same should result in containing import bill where last year raw cotton imports were reported at 4.9 million bales as against an average of 3 million bales per annum. Local yarn margins are currently hovering around Rs247.2/kg as against Rs176.2/kg during FY21, due to robust demand outlook of textile products. Textile sector performance has remained sluggish despite significant positive developments supporting earnings outlook.