Stock Review

Upcoming monetary policy may define direction

During the first week of the New Year, ended on January 07, 2022, the benchmark index of Pakistan Stock Exchange (PSX) closed at 45,346 points. Average daily trading volume rose to 318 million shares, from 218 million shares a week ago. Major gainers were: STJT, HUBC, ISL, GATI and UNITY, while top laggards included: TRG, HMM, MUREB, PMPK and KTML. Tabling of Finance Amendment Bill and State Bank of Pakistan Amendment Bill during the latter part of the week indeed provided confidence to investors on the eventual resumption of IMF program.

Other important news flows of the week were: 1) FBR revenue collection jumping 18%MoM to PKR600 billion in December 2021 taking 1HFY22 revenue collection to PKR2.92 trillion, up 32.5%YoY, 2) inflation rate rising to 12.3%YoY during last month of previous calendar year, 3) furnace oil offtake from refineries improving with IPPs placing orders of 250,000 tons for January 2022 alone, 4) cement dispatches declining to 4.6 million tons in December 2021 as compared to 4.8 million tons during the same period a year ago, 5) trade numbers suggesting 106.4%YoY increase in trade deficit during 1HFY22 and 6) Power division releasing another 40% amount to 12 IPPs under the MoU signed in CY21.

Within major sectors, Power segment recorded a gain of 3.0%WoW, followed by Fertilizers up 2.8%WoW, while Textile composite was down 1.5%WoW. Overall, Textile Weaving segment registered strongest increase of 10.1%WoW, followed by Transport (up 6.8%WoW), whereas Woollen segment stood as the laggard, down 3.5%WoW.

Foreigners emerged net buyers at US$24.1 million, excluding gross buy of US$26.0 million which is likely to include strategic buying by TRG of its shares, the group stands as a net seller of US$1.9 million. On the local side, Individuals stood on the selling side with a net sell of US$15.1 million followed by Mutual Funds with a net sell of US$8.4 million – which is likely to include contra position of TRG transaction – whereas banks turned out to be on the other side of the spectrum with a net buy of US$7.0 million.

Key events to watch in the upcoming week are: 1) National Assembly session being called to consider Finance Amendment Bill 2021, and 2) IMF Board meeting on January 12, 2022, which is likely be delayed on possible request by Pakistani counterparts subject to completion of prior actions as already hinted by the authorities). In the near term, the upcoming Monetary Policy on January 24, 2022 would determine market direction. The central bank has already indicated a pause to interest rate hike, but any further tightening given already higher trade deficit for December 2021 and uptick in commodity prices could result in distressed stock performance in the short run.

The CY 2021 finally closed on a disappointing note as the index performance clearly fell short of the expectations, closing at 44,596 points, returning 3% on a YoY basis. For December 2021 alone, the market returned negative 1.1%MoM over uncertainty on tabling of “mini-budget” and SBP amendment bill in order to revive the IMF program. Strong corporate profitability growth during CY21 largely remained unappreciated due to: 1) COVID-19 rebound, 2) commodity prices boom, 3) dormant IMF program and 4) interest rate hikes denting investors’ sentiments. Average daily trading volumes during CY21 hovered at 475 million shares, as opposed to 329 million shares over the same period last year. Foreigners’ net selling was reported at US$359 million during CY21, on top of CY20 net sell of US$571.5 million. Consequently, the foreign ownership of PSX has contracted to 15% in CY21 as opposed to 20% in CY18. Market direction going forward will be determined by GoP’s ability to strike a deal with the IMF in order to revive the dormant US$6.0 billion EFF program. Any delay in the revival of the program will keep the market performance jittery and investor may succumb to some selling pressure in the market. Volumes are also likely to remain low as the investors may adopt a wait and see approach.

Through the Supplementary Finance Bill the incumbent government intends reversing much of the relaxations announced in FY22 Budget in form of FED and GST. The proposed bill has doubled the rate of FED on vehicles above 1,000cc whereas GST on 1,000cc vehicles has been reverted back to 17%, from existing 12.5%. Now that the incentives are being rolled back, analysts expect a slight slowdown in the industry growth as soon as prices are increased. They expect the volumes in CY 2022 to remain stagnant at CY 2021 level; a deviation of 10% on either side is likely to impact the profitability of the assemblers. The mini budget may also prove to be a blessing in disguise as much of the importance has been stressed upon the curtailment of imports. Hence, protective duties on imported CBUs have also been increased in the proposed finance bill which bodes well for local industry. They expect the growth in profitability to be driven mainly on the back of expanding margins in CY 2022 on account of: 1) stable exchange rate, 2) reversal in commodity up cycle and 3) new models in pipeline (INDU’s Hybrid Corolla, PSMC’s Swift and HCAR’s Civic).

Local cement dispatches declined to 4.1 million tons during December 2021, down by 3.0/1.6% YoY/MoM. Region wise, the decline was more pronounced in North, witnessing a decline in dispatches of 3.5/2.7% YoY/MoM. Overall the analysts expect local demand to remain strong during FY22 as economic activity continues to pick up where private sector is expected to provide the major support to demand. Given the current coal prices and delayed pass-on of increased costs by cement players previously, analysts continue to maintain stance of pressure on margins in near term. Volatility in coal prices is expected to keep cement sector volatile as well. However, the aforesaid volatility can provide good entry points into the sector where analysts maintain their overweight stance, highlighting LUCK, MLCF and FCCL as the top picks from sector.

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