IMF talks may lead sentiments; major stocks to shine
During the week ended on March 11, 2022 global commodity prices reach unparalleled highs, affecting the market, KSE-100 losing 2.0%WoW to close at 43,653 points. Local political uncertainty along with central bank’s hint of potential further tightening (as a result of commodities super cycle) also negatively contributed to market sentiments. However, average daily trading volume was up 0.3% to 213 million shares this week.
Other major news flows during the week were: 1) FATF retaining Pakistan on the grey list, 2) GoP pursuing financial support of about US$21.7 billion from China through rollover of existing loans of US$10.7 billion and US$10.0 billion as deposit fund, 3) Forex inflows in RDAs reaching US$3.6 billion in 18 months, 4) Public debt up 9.5% during first seven months of the current financial year, 5) GoP raising PKR951 billion as T-Bills’ yields see up to 130bps rise, 6) US and Pakistan agreeing to reinvigorate and revitalize trade and business relationships to enhance bilateral trade and investment, 7) Six-month KIBOR reaching two-year high at 11.93%, and lastly 8) NEPRA increasing electricity tariff by PKR5.95/unit for January 2022.
Sector-wise, the gains remained small, with the top performing sectors being: REITs, Close-end Mutual Funds, Technology and Communications. The least favorite sectors were: Refinery, Oil & Gas Marketing Companies, Engineering, Modarabas, and Vanaspati and Allied Industries. Stock-wise, top performers were: SYS, NATF, SHFA, THALL and MLC, while laggards included: MTL, HMM, KTML, UNITY and NRL.
Flow-wise, Mutual Funds remained as the net sellers, offloading US$7.1 million followed by Foreigners (US$3.1 million), Insurance Companies (US$0.6 million) and Brokers (US$0.3 million). While Banks, Companies, Individuals and Other organizations were on the buying side, with a net buy of US$1.5 million, US$5.5 million, US$0.4 million, and US$3.7 million respectively.
Global commodities pared gains this week, leading to a positive impact on the market. This along with local political unrest and Russia-Ukraine peace talks will continue to steer the market’s trend. Additionally, news flows related to ongoing IMF review would also dictate market sentiments in the coming weeks, warranting a closer look. Analysts advocate for gradual accumulation in fundamental scrips with a longer term focus. They prefer Banks (on possible further monetary tightening by the central bank), select Techs and other value stocks.
During February 2022 total industry sales were recorded at 27,153 vehicles, up 28%YoY and 3%MoM), consisting of 18,053 passenger cars, out of these there were 3,610 LCVs and 501 trucks, witnessing a fine month, posting growth despite fiscal tightening, although, at a decelerated rate. 8MFY22 total industry sales were reported at 218,750 units, up 48%YoY, consisting of 149,811 passenger vehicles, 28,422 LCVs and 3,762 trucks, continued to remain strong, especially passenger vehicles whose numbers have exceeded the previous high 170,000 units in 8MFY18. The effect of stimulus provided in FY22 budget continues to persist despite the reversal through supplementary finance bill. Segment-wise, the 800cc and 1,000cc segments emerged victorious, posting growth of 71%60%YoY and 45%YoY. On the flipside, the sales of premium 1,300cc+ segment declined 32%MoM on account of supply chain issues due to persistent semiconductor chip shortage. In 8MFY22, the volumes of 800cc/1,000cc/1,300cc+ segments have depicted a growth of 74/78/39%YoY. Amongst major OEMs, PSMC presented robust growth of 40%MoM/42%YoY as the Company was finally able to deliver its products this month which were supposed to be delivered last month. By contrast, volumes of INDU and HCAR both displayed a contraction of 32%MoM, missing their monthly targets. In 8MFY22, the sales of PSMC/INDU/HCAR have posted a growth of 69/38/42%YoY. On the macro perspective, analysts expect slight slowdown in the volumes going forward where the sales figures in upcoming months are extremely important to analyze the intensity at which the industry gets hampered. To recall, auto loans have contracted 0.4%MoM, declining for the first time since June 2020, thereby giving a clear indication that the growth has started to slowdown.
Refinery margins for second half of February 2022 were reported at US$12.8/bbl for HSD as against US$12.5/ bbl for previous fifteen days where threat of Russia’s gas supply to Europe being discontinued loomed large, giving rise to expectations of a demand shit from gas to HSD. MOGAS margins for these fifteen days were US$11/bbl as against US$9.3/bbl for the previous fifteen where supply-demand imbalance is again at play with ongoing geopolitical tensions providing further impetus. Moving forward, refinery margins are expected to remain elevated where increasing tensions are only going to uplift them further while countries across the globe prioritizing to secure local supply will further tighten the supply. HSFO cracks can also be expected to improve after a long time if sanctions on Russia intensify with the risk of one million barrels per day of Russian HSFO supply going out of market. To note, HSFO margins continue to remain negative, standing at negative US$19/bbl for last fifteen days of February 2022 against negative US$18.4/bbl for previous fifteen days. Overall, local refiners can turn out to be one of the main beneficiaries of the ongoing geopolitical tensions and commodity super cycle where not only margins are expected to improve, but significant inventory gains can also be witnessed as oil prices continue to make new highs.
Oil prices soared to the highest level since 2008 after the US hinted on a potential embargo on Russian supplies with its allies. Brent index spiked to above US$139/bbl, before easing back to below US$130/bbl. The US statement came after a temporary ceasefire between the warring states failed. Higher oil prices may trigger a global recession (like one triggered by Middle-eastern oil embargo of 1970s) and Pakistan will be no exception. In Pakistan’s case, the risks get magnified further as the country is already struggling with elevated CAD which may touch around US$18 billion in FY22 (5.2% of GDP). The country also announced a relief package ranging from PKR250 billion to PKR300 billion aimed at containing fuel prices for the masses which was to be funded through higher tax collection. However, as oil prices touch new highs, the fiscal space will quickly erode and GoP will likely use OMC sector’s books in order to fund the outlay. This will create liquidity concerns for the sector as payments under price differential claims are delayed (same as was witnessed in 2008). Should international oil prices remain downward sticky, the GoP may have to or should) roll-back some of the incentives announced in the recent relief package. The dynamics of energy chain will worsen significantly as circular debt accretion will be much faster as the price pressures are not passed on to the end consumers. Consequently, analysts see further de-rating in country’s energy chain.