Index may stimulate on important IMF talks
In a shorter than usual week, market remained volatile. The start of the week witnessed across the board selling as investors became jittery on the news that IMF talks remained inconclusive. However, once a clarification was published that negotiations were still going on; market took a sigh of relief on second day of the week and gained 1.9% in a day. The same momentum was carried into third trading day. However, on the fourth day, news flow regarding IMF discussions again caused jitters and a sell-off was witnessed. The benchmark index closed the week at 45,578 points, up 1.69%WoW.
Commercial Banks remained amongst major performers during the week as increasing inflation and depreciating exchange rate infused expectations of interest rate hike. To note, yields of 3-month T-Bill increased by 40bps in the latest auction. Increasing oil prices on the back of global energy crunch created interest in oil and gas exploration companies with the sector posting an increase of 2.1% during the week. One of the major beneficiaries of depreciating exchange rate is the textiles and clothing sector, posting a positive return of 2.7% for the week.
Foreigners remained on the selling side during the week, posting a net sell of US$12.8 million; bulk of this selling was absorbed by insurance with a net buy of US$6.49 million. Average daily traded volume during the week declined to 306 million shares, a fall of 10.5%WoW. Major gainers were: AICL, UBL, KOHC, EPCL, and HBL, while laggards included, MTL, JDWS, GHGL, HCAR and KAPCO.
Other news flow during the week included: 1) the GoP announcing a countrywide uniform increase in base electricity tariff, 2) Large-Scale Manufacturing (LSM) posting a growth of 12.74%YoY in August this year, 3) Pakistan’s current account deficit narrowing to US$1.1 billion in September and 4) GoP planning to issue a Panda bond by March 2022.
Market is expected to watch a number of events closely where ongoing negotiations with IMF remain paramount and an agreement there will prove to be a significant stimulus for the market. However, political arena is heating up with opposition parties staging protest across the country. Even though protests in their current form will largely be a non-event from stock market’s vantage, any escalation in tensions can weigh heavily over the market. Lastly, notification of DG ISI’s appointment is still awaited, which will be a significant trigger for the market.
FATF in an unsurprising move has retained Pakistan amongst Jurisdictions under Increased Monitoring, commonly known as the “Grey List”. The message was similar to previous ones of encouragement on reforms undertaken by the authorities, but playing ‘do more’ mantra. At present, Pakistan is compliant on 26 out of 27 counts on the initial action plan set in June 2018. In an unparalleled swiftness, Pakistan has achieved progress on 4 out of 7 directives imposed in the previous meeting. The focus has now clearly shifted towards demonstration of implementation of Terrorism Financing and Money Laundering laws. As per the FATF standards, Pakistan seems to have achieved compliance with majority of the 40 requirements under MER Evaluation Criteria opening up prospects for improvement in effectiveness ranking. A strong possibility exists for Pakistan to elevate itself from the existing group in the medium run, benchmarking the timeline to recent up-gradation of Mauritius. Analysts see the latest FATF review to be a non-event for the market with all eyes set on ongoing IMF review defining the tone of the market in the near term.
With prices of energy products experiencing an upswing, cost of generation on coal, furnace oil and RLNG has gone up significantly. The full impact of pass through of this in cost of generation will likely be realized in the beginning of next year. In this backdrop, analysts have mapped out potential impact on energy costs particularly when there is increasing risks of gas shortage in the coming months. To highlight, coal still remains slightly cheaper at current rates where the cost of generation is Rs18/unit whereas the cost of generation is expected to touch Rs20/unit on RLNG and Rs24/unit on furnace oil. Unlike last year, the gas crisis is likely to hit during peak winter (November and December), when the share of hydel generation in overall generation mix is considerably lower amid lower water supply. Consequently, the shortfall in generation will likely be bridged through expensive furnace oil based generation. This improves the prospects of volumetric off-takes for refineries, but also exposes them to an accretion in circular debt. Since the monthly fuel adjustments are made with a lag of two months, the impact of higher fossil fuel prices will be reflected during the month of January and February 2022, where analysts expect a monthly adjustment of up to R2.25/unit. However, the adjustments coincide with lower seasonal inflation, keeping inflationary readings contained. From the vantage of stock market, higher energy inflation will translate in higher headline inflation, especially as GoP revises base tariff to unlock IMF inflows. On the back of higher energy inflation, analysts see CPI going in double digits and may witness faster than anticipated hike in interest rate.
According to a report, AKD Cement Universe is expected to post profit after tax of Rs5.1 billion for 1QFY22 as against net profit of Rs3.2 billion for 1QFY21. However, on sequential basis, a decline is expected as coal prices take a toll on margins and profitability of players. Moving forward, the sequential decline is expected to continue into 2QFY22 as coal prices remain on upward trajectory, currently trading at US$230/ton against effective price of US$110/ton for 1QFY22, with the pass-on remaining limited. LUCK and MLCF are expected to remain comparatively insulated from increasing coal prices where low cost structure aids. However, additional buffer for LUCK has been created by increased other income. Even though the sector has remained under pressure lately, analysts term this as an opportunity to accumulate where an expected decline in coal prices post-winter can induce a rally in the sector