Market witnessed a volatile week on devastating floods
Pakistan Stock Exchange witnessed a volatile week as the country experienced devastating floods triggered by the heaviest monsoon rains in a decade which killed about 1,200 people and submerged one-third of the country.
Although, there was respite due to receipt of US$1.1 billion tranche from International Monetary Fund (IMF) and crude oil price falling by US$6/bbl on the back Chinese economic weakness, hawkish FED stance and reemergence of Iranian supply. The index lost 283 points to close at 42,309 on September 02, 2022, last trading day of the week.
On the macro front, PKR/US$ parity remained range bound, gaining 0.76% during the week. This came on the back of IMF Board decision to restart Pakistan’s EFF facility, with the receipt confirmation coming on Wednesday, resulting in currency rebounding from its July 2022 highs of PkR240/US$. Furthermore, CPI surged to a multi-decade high of 27.3%YoY during August 2022, as authorities continue to warn massive flooding in the country could exacerbate already skyrocketing prices, especially food items.
Trade deficit for August 2022 was reported at US$3.5 billion, down 27%YoY, while foreign exchange reserves were reported at US$7.7 billion on August 26. Market participation remained very dull as average daily turnover decreased by 15.4%WoW to 211.3 million shares for KSE-All Companies index. On the commodities front, prices of MS/HSD were reported at PKR235 and PKR 249, as GoP decided to end the month by increasing petroleum levy on MS.
Other major news flows during the week were: 1) Pakistan is weighing the option to seek an emergency loan from the IMF, estimating damages at PKR2.5 trillion and GDP growth to slow down to just 2% during the current financial year, 2) The Onsite Inspection Team of the Financial Action Task Force (FATF) is scheduled to arrive Pakistan in the first week of September, 3) IMF on Monday revived Pakistan’s program and its Board approved US$1.16 billion tranche, 4) The FBR has provisionally collected net revenue of PKR489 billion during August 2022 as against a target of PKR483 billion.
Leather & Tanneries, Cements and Paper & Board sectors were amongst the top performers, up 8.3%/3.9%/3.3%WoW respectively. On the other hand, Tobacco, Transport and Refineries were amongst the worst performers with declines of 7.1%/6.6%/%WoW.
Flow wise, major net selling was recorded by Insurance (US$7.38 million). On the other hand, Individuals and Banks absorbed most of the selling with net buy of US$2.38 million and US$3 million respectively.
Stock wise, top performers included: SRVI, KOHC, FABL, CEPB and JVDC, while top laggards were: POML, NML, PAKT, PSEL and DAWH.
The outgoing week saw confirmation of IMF’s tranche receipt, while other inflow commitments from friendly nations resulted in the domestic currency standing strong. Although, impending near-term inflation is expected to wreak havoc, especially on the food/energy front, creating an overall shaky sentiment. Until foreign exchange reserves come toward a more secure position, domestic currency is expected to remain volatile, keeping investor confidence muted. However, with the economy slowing down—an intended outcome of the SBP’s contractionary policies—and the effects of floods across the country, could add further fuel to the fire. However, recent slump in commodity prices, especially oil may be a positive development for country’s external account, pushing CAD to remain on the lower end. We recommend market participants to stay cautious and focus on defensive plays. Any good bull run should be taken as an exit point.
The KSE-100 index traded up by 5.5%MoM, gaining 2,200pts during the month, with confidence returning to the market following the IMF’s executive board’s approval of the 7th and 8th tranche to Pakistan—totaling US$1.1 billion, reversing the losses from the previous month (July 2022 KSE-100 down 3.3%MoM). This takes the CYTD return of the index to negative 5.0%. Volumes were strong during August 2022, with daily volume in the market averaging 438.2 million shares during the month, as compared to 223 million shares in the earlier month. Of these, KSE-100 volume averaged 229.47 million shares on a daily basis in August 2022. PKR strengthened against the US$ during the month by 9.4% with sovereign default fears subsiding. Consequently, the index returned a US$-denominated return of 13.8% during the month. On a sectoral basis, the best performing sectors in Aug’22 were Automobile Parts Manufacturers, Woolen, Refineries, returning 19.0%/18.3%/14.0%, respectively. As opposed to this, Miscellaneous, Tobacco, Vanaspati were the worst performing sectors during the month, posting a negative return of 22.8%%/13.2%/9.5%, respectively. With Pakistan’s external situation now appearing manageable, outlook for the market appears positive. However, onset of floods as well as continued inflationary pressures may temper outlook. In the short-term, with IMF assistance being there, the market will be looking at: 1) further flows from bilateral and multilateral agencies, 2) inflation reading for August 2022, and 3) result of the on-ground verification of the FATF team, expected to conclude by September 02, 2022.
CPI inflation for the month of August 2022 is expected to be at 26.9%, this comes on the back of monthly inflation of 2.2%MoM. Food, clothing and housing indices are the key drivers behind this month’s soaring headline inflation, each reporting monthly inflation of 1.1%, 1.1% and 6.0% respectively.
With country affected by the worst of flooding in the recent memory, we do not expect inflationary pressures easing off anytime soon as large scale destruction of food crops across Sindh and Southern Punjab regions will introduce another wave of inflationary pressures.
Consequently, analysts revise their inflation estimates for FY23 to 24% as opposed to our earlier estimates of 21.5%. The revision comes after they upped MoM inflation estimates by 20bps in the wake of crop damages arising from floods.
The central bank chose to maintain interest rates at 15% in the previous MPS, against a forecast of 50bps to 100bps hike. However, soaring inflation reinforces the consensus that SBP will be forced to increase the interest rates further in coming months. The current real interest rate (using August 2022 inflation estimates) comes close to negative 1200bps, amongst the highest in the world.
Market will remain jittery as the anticipation of further rate hikes by central bank builds up owing to flooding in the country. Governor SBP, in the last MPS highlighted his expectations that inflation will peak out towards the end of CY22 and there will be a sharp decline from the new financial year. However, the recent flooding in the country may force the central bank to revise its inflation estimates and recalibrate it strategy.