Index to keep rallying on IMF review outcome
Extending rally for the fourth consecutive week, the benchmark index closed the week ended on November 06, 2021 at 47,296 points, up 2.33%WoW. It was the highest weekly gain since May 2021 as investors turned optimistic on a possible breakthrough in much awaited IMF review and the incumbent government possibly regaining political capital through Rs120 billion subsidies on key food commodities. Trading volumes also improved with daily average turnover rising to 429.7 million shares during the week as compared to 219.1 million shares a week ago, it was the highest in last 8 weeks.
Other major news flows during the week were: 1) FBR collecting Rs1.8 trillion during July-October period of 2021, exceeding the target by Rs232 billion with October 2021 tax collection reported at Rs439 billion, up 33%YoY, 2) inflation rising to 9.2%YoY in October on hike in energy and food prices, 3) trade deficit narrowing 9.75%MoM to US$3.8 billion indicating that the measures announced by authorities to curb non-essential imports are yielding results and would foster external account stability, 4) OMC sales up 22% in 4MFY22 to 7.85 million tons, 5) textile exports reaching an all-time high of US$6.0 billion in first four months of current financial year and 6) yield on 3-month Government paper increasing by 25bps leading to 127bps hike since last monetary policy showcasing market expectation of interest rate trajectory going forward.
Sector-wise, within mainboard, Techs regained momentum and were up 10.4%WoW followed by Engineering and Cements returning 5.5%WoW and 5.1%WoW respectively, whereas overall, Jute and Refinery sectors emerged as leaders with gains of 19.8%WoW and 14.6%WoW, respectively.
Flow-wise, foreigners emerged net sellers, drawing out US$11.2 million, along with Mutual Funds (net sell US$6.3 million) which was mainly absorbed by Individuals (US$14.4 million) and Insurance Companies (US$6.5 million).
Stock wise, major performers were: SFL, HASCOL, SRVI, SYS, ANL, while laggards were: STJT, FML, GATI, PMPK and THALL.
Market sentiments are likely to be driven by news flows relating to IMF review in the near term. Other key factors influencing market performance going forward are: 1) Pakistan set to be reclassified into MSCI FM from MSCI EM where changes are to take effect by November-end, and 2) monetary policy which is due to be announced also towards the end of the month. We continue to advocate from thematic plays which include Banks (on monetary tightening), Construction-driven sectors (Cements, Steel), and Textiles (on devaluations and strong export prospects).
The benchmark index of Pakistan Stock Exchange (PSX) offered return 2.9%MoM during October 2021, while the US$ adjusted return during the month were reported at 2.3% as Rupee depreciated by 0.6%MoM against the Greenback. Resolution of civil-military relationship, announcement of Saudi support package and increasing likelihood of an agreement between IMF and authorities to revive the plan were the key triggers. Flow wise, Foreigners continue to take exit from Pakistan’s traditional sectors with a net sell of US$31 million, where Commercial Banks and Fertilizers saw the highest net outflow of US$25.3 million and US$23.3 million respectively. The benchmark index profitability grew by 21%YoY, with the key outperformers being Engineering (profitability up by 352%YoY) and Textiles and clothing (profitability up by 163%YoY). Other mentions include Autos and Cements. The benchmark index has returned minus 2.4%FYTD, but may be primed to post a strong rally going forward. Things are finally looking better after halt in rapid depreciation of Rupee halted by Saudi support package, building expectations about IMF and authorities reaching consensus regarding the revival of US$6.2 billion program and easing coal prices. Analysts recommend building positions in Banks (Discount rate hike), Cements (coal prices coming off and increasing cement prices), Textiles (attractive valuations) and Fertilizers (FFBL on possible reclassification in Islamic index).
OMC sales were reported at 2.0 million tons, up 17%YoY on MoM basis, but a meager improvement of 1%MoM was witnessed. The increase was led by HSD with an increase of 25/18% YoY/MoM where analysts believe apart from improved business activity; curb in smuggling also played a part after border controls were increased. Overall, OMC volumes increased by 22%YoY during 4MFY22, with FO witnessing the highest increase of 32%YoY on the back of increased power generation while MS/HSD witnessed an increase of 14/26%YoY. Market shares remain fluid with PSO/APL/HASCOL/SHEL accounting for market shares of 52/8/1/8 percent during October 2021. The comparison with October 2020 reveals PSO share increasing by 7ppts, while market share of APL/HASCOL decreased by 2/4ppts. Analysts expect OMC volumes to tread the same path with economic activity picking up pace. The incentives provided in FY22 Budget to agriculture sector along with focus on infrastructure spending can provide a significant uplift to volumes in medium term.
Pakistan is set to be classified under Frontier Markets from Emerging Markets on November 11, 2021 with the change coming in affect by Nov-end. This should draw curtains on country’s 4 and half year long ride in EM index — the second in Pakistan’s market history — during which the market witnessed net foreign outflows of US$1.4 billion and performed 1.4% during this period as against 26.2% of MSCI EM index. Together with the current review, MSCI shall open consultation for classifying Pakistan in MSCI FM 100 index and MSCI Frontier Markets 15% Country Capped Index, with possible announcement in February 2022. Pakistan is expected to fetch an indicative weight of 1.9% in FM as per MSCI release, which is significantly lower than 9% when the country exited FM back in 2017. While Argentina is downgraded from MSCI EM as a standalone index, potential reclassification to FM could further compress Pakistan’s weight in the index. The transition is unlikely to materially alter market’s participation dynamics, and macro factors would continue to dominate market direction where possible resumption of IMF program with GoP addressing structural issues, ease-off in commodity prices (Brent at its one month low, coal prices coming off 39% from peak) and relative calm on political front to stretch current rally at the bourse.