Uncertainty still prevails
The week ended on June 03, 2022 witnessed sluggish movement in the first three days and the market took a hit on Thursday and Friday. The benchmark index, KSE-100 lost 3.6%WoW to close at 41,315 points. Economic uncertainty along with rising interest rates and bond yields kept the sentiments subdued. Average daily trading volume for the Index declined to 10 million shares, posting 25.3%WoW decline.
Major news flows during the week were: 1) GoP increases prices of POL products, 2) Pakistan agrees terms for rollover of US$2.3 billion debt from China, 3) Moody’s changes the outlook for Pakistan to negative, 4) NEPRA hikes base-tariff by Rs7.9/unit, 5) T-Bills yields jump 75bps for 3-months and 12-months tenor and 55bps for 6-month paper, 6) foreign exchange reserves held by the central bank SBP dip below US$10 billion, 7) GoP shocks consumers with R213/liter hike in cooking oil prices, 8) GoP lifts ban on import of raw materials and machinery for industrial sector and 9) Pakistan shut out of international bond markets.
The top performing sectors were: Vanaspati & Allied Industries and Sugar & Allied Industries, while the least favorite sectors were: Automobiles parts & accessories, Engineering, Leasing companies, Woolen and Cement.
Stock-wise, top performers included: POML, SCBPL, ABOT, COLG and ABL, while laggards were: TGL, THALL, CHCC, PGLC and PSX.
Flow-wise, Insurance companies remained the net sellers, offloading US$7.8 million followed by Mutual Funds with US$4.1 million). Individuals and Companies were on the buying side, with a net buy of US$5.6mn.
With T-Bills yields rising and amid political uncertainty, the market remained in a state of indecisiveness. Incoming news regarding IMF is bound to remove some of the gloom, but the longer it is delayed the more the uncertainty is going to influence the market. The local currency has started paring some of the losses it has made recently, appreciating to Rs198/US$ at the time of writing, with fresh inflows likely to materialize once the IMF deal is closed. With rising interest rates and the GoP removing subsidies from POL products, overall market outlook remains uncertain at best as analysts await news from IMF. They retain their liking for Refineries and IT sector in the current backdrop and advocate for gradual accumulation in fundamental scrips with a longer term focus.
May 2022 proved to be a tough month for the local equity investors where the index returned – 4.8%MoM on closing basis. This was the worst monthly index performance since September 2021 when the index returned –5.3%MoM on the closing basis. Also with PKR depreciating by over 6% MoM, the USD adjusted return during the month stands around –11%MoM. The average daily trading volume shrunk to 252.2 million shares during the month as opposed to 289.5 million during the last month. The lackluster market participation is reflective of rising economic uncertainty as the soaring trade deficit; huge external debt servicing and rapid reserve depletion is making the investors jittery. The major underperforming sectors during the month were Cements, Engineering and Pharmaceuticals. While the sectors that were able to outperform the benchmark index were Sugar and Leasing companies. Market is eagerly anticipating announcement of IMF agreement which will not only allow country to unlock further inflows and help meet its maturing debt liabilities but will also help instill confidence in the market. The GoP has already made a headway on reviving the deal by partially rolling back subsidies on the consumption of fuel. However, more needs to be done to get IMF on board.
Global coal prices are on the rise after previously reaching an all-time high of USD460/ton in March on the Richard Bay index. Although, the prices came down after to as low as US$252/ton, the current prices hover US$324/ton. The average price on the index for May 2022 was US$320/ton, up 10%MoM and 215%YoY. International scrap prices have contracted 29%MoM in May’22, currently hovering around US$440/ton compared to FYTD/CYTD average of US$508/553/ton. Moreover, CRC-HRC spread has contracted, currently trading at US$82/ton as compared to a high of US$142/ton and an average of US$98/80/ton in FYTD/CYTD. The global scarcity of urea has kept the price of this chemical elevated at US$585/ton (down 18.75% MoM/45%YoY), translating into local price of Rs9,000/bag, a discount of 80% from the local price which currently stand at PkR1,850/bag. Although, YTD average for the commodity stands at US$725/ton Global food prices have reached record highs since the war in Ukraine began, causing food and agricultural trade to be disrupted, further exacerbating the already tight supplies and resultantly fueling inflation. Russia’s invasion in the Eastern European nation not only reined havoc on food supplies, as Ukraine is one of largest grain and vegetable oil supplier, it also caused major grain exporting nations to halt external sales.
GoP recently banned import of Autos for an initial period of 2 months, although this might get extended further. We believe this to have a positive impact on the sales of OEMs, due to the fact that the market for imported vehicles is going to dissipate. PSMC will be the biggest benefactor of this given the relatively stronger competition from imported vehicles in the less than 1000cc segment. The local OEMs are exposed to exchange rate volatility, mainly the Dollar, Yen, and the Baht. Where in every 5% devaluation in the Rupee, HCAR would lose PKR0.6/share from the profits, PSMC would lose PKR1.2/share and INDU would lose PKR43.1/share. SBP recently announced that tenures for auto-financing are to be reduced by 2 years, 5 years for cars in the below 1000cc segment, 3 years for cars above 1000cc. According to estimates, this will increase the monthly installments by 40%. This along with rising interest rates means auto-loans will become more unaffordable for a significant portion of customers. Demand in the industry will reduce due to the new auto-financing tenures announced by SBP, further impacted by continuously rising prices for vehicles. However, the import ban is likely to act as a buffer in the short-term. Demand in the industry is likely to reduce by 20% to 30% in FY23, as per our estimates. In the short-term and upcoming quarter, sales are not expected to be impacted as the order books of the OEMS extend further than 2 months