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PSE performs poorly in fy22 across the region

PSE performs poorly in fy22 across the region

Pakistan Stock Exchange (PSE), concluded FY22 with the benchmark index returning negative 12.3%, while on the back of hefty currency depreciation of 30%YoY during FY22, the dollar adjusted return throughout FY22 came to negative 42.3% making the KSE-100 index one of the worst performing indexes in the region.

Amid tough economic outlook, the market participation remained dull throughout FY22, with the average daily traded volume during the year reported around 292.7 million shares as opposed to 527.4 million shares it averaged during FY21. As for the outgoing month, the average trading volume was slightly above the yearly average, clocking around 298 million shares during June 2022.

Flow wise, foreigners accelerated to cut positions in line with their global strategy with an outflow of US$297.5 million, on top of the US$387.3 million outflow seen during FY21, taking the total outflow over the last two years past US$684 million. On the other end of the spectrum, Individuals and Banks absorbed bulk of the foreign selling with a net inflow of US$157 million and US$115.2 million respectively.

Market volatility will continue to remain elevated with the near term economic outlook continuing to remain hazy as the official announcement of revival of IMF program is still awaited. In the meantime, the reserve hemorrhage will continue as the current account position will continue to remain challenging. We therefore advise investors to maintain a cautious approach in the market and take any bull run as a good exit point.

The outgoing financial year FY22 concluded with the benchmark index returning negative 12.3%, while on the back of hefty currency depreciation of 30%YoY during FY22, the dollar adjusted return throughout FY22 stood at negative 42.3% making the KSE-100 index one of the worst performing index in the region. Amid tough economic outlook, the market participation remained dull throughout FY22 where the daily traded volume during the year averaged around 292.7 million shares as opposed to 527.4 million shares it averaged during FY21. As for the outgoing month, the average trading volume was slightly above the yearly average, clocking around 298 million shares during June 2022. In terms of top performing sectors, Jute, REITs and Fertilizers were the major outperformers while Refineries, Engineering, Cements were the key underperformers.

Flow wise, foreigners accelerated to cut positions in line with their global strategy with an outflow of US$297.5 million, on top of another outflow of US$387.3 million seen during FY21, taking the total outflow over the last two years past US$684 million.

On the other end of the spectrum, Individuals and Banks absorbed the bulk of foreign selling with a net inflow of US$157 million and US$115.2 million respectively. Within major sectors, the major outflow was seen in banks and cement sectors which saw a cumulative outflow of US$262 million.

The sectors which were recipients of fresh FIPI inflow were Tech, Power and Textile composites which saw a total inflow of US$69.2 million, which contained the headline FIPI number in check.

Market volatility will continue to remain elevated with the near term economic outlook continuing to remain hazy as the official announcement of revival of IMF program is still awaited. In the meantime, the reserve hemorrhage will continue as the current account position will continue to remain challenging. Analysts therefore advise investors to maintain a cautious approach in the market and take any bull run as a good exit point.

One time tax

Miftah Ismail, Finance Minister of Pakistan, in his speech in the parliament announced an additional one time super tax of 10% to be imposed on FY22 earnings on specified sectors where companies make annual profit of over Rs300 million. Hence, the effective tax rate for specified sectors would increase to 39% from 29% for Tax Year 2022 and will be at 29% in Tax Year 2023. That said, additional 10% tax will be a one off tax and will not apply to tax year 2023.

As per Finance Minister speech, these specified sectors include Sugar, Cement, Steel, Textiles, Tobacco, Fertilizer, Banks, Oil & Gas, Beverages, Automobiles, Airline, Chemical and LNG Terminal. The exact list will be available once the emended Budget document is released.

This will negatively impact earnings of these big companies by 14% in year 2022. No impact on future profits as Finance Minister mentioned that this one time super tax of 10% will impact 2022 earnings of above mentioned sectors/companies.

For other sectors, effective tax rate is likely to increase from 29% to 33% in tax year 2022 as additional 4% tax will be levied over and above the corporate tax rate. For tax year 2023, effective tax rate will 29% as there will be no additional tax.

As per initial understanding, effective tax rates for banks will increase to 43% in Tax Year 2022 from effective tax rate of 39% previously. For banks, tax on government securities (having ADR of less than 50%) will be at rates as proposed in Finance Bill. From tax year 2023, effective tax rate of banks will be 42%, we believe. More clarity in this is still awaited.

Smaller companies, earnings over PKR150 million and less than PKR200 million will be subject to 1% tax. For companies earnings between PKR200 million to PKR250 million will be subject to 2% tax whereas companies earning between PKR250 million to PKR 300 million will be subject to 3%.

As per our estimate, this measure can result in additional tax collection of PKR 250 million to PKR300 billion for government. This may help in achieving the revenue and deficit target set by IMF. Government is likely to set tax revenue target of PKR7.4 trillion up from the initial target set of PKR7 trillion for FY23.

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