PSX remains under pressure
Pakistan Stock Exchange (PSX) benchmark index witnessed an overall volatile week ended on January 07, 2023. Depletion of foreign exchange reserves continued, fueling uncertainty. Reserves have fallen by approximately US$2 billion since December 2022 began, pulling import cover down to alarming low level.
Although, some respite was seen towards energy stocks such as PPL, OGDC and refineries with news amidst gas circular debt resolution and fresh investment in a coastal refinery from Saudi Arab (aided by the much anticipated refinery policy).
Overall, average daily trading volume remained low at 176 million shares, as compared to 214.2 million shares traded in the earlier week. The Index gained 588 points during the week, depicting a 1.45% increase.
The PKR also lost some footing against the US$ and depreciated 0.31% to end at PKR227.14/US$ parity on January 6. CPI was still at multi-year highs, at 24.5% for December 2022, lower than expectations as compared to 26.6% in October 2022.
Finally, trade deficit for November 2022 was reported at US$2.79 billion, down 28.4%YoY. Foreign exchange reserves held by SBP were reported at US$5.6 billion as at December 30, 2022.
On the international front, crude oil remained volatile, averaging at US$82/bbl as the global commodity remained in a limbo on the back of on/off Chinese lockdowns and the emergence of the newer COVID Omricon variant.
Other major news flows during the week were: 1) Pakistan will have to repay by January 10, 2023, US$1.3 billion in foreign loans, 2) annual inflation measured by the Consumer Price Index (CPI) was recorded at 24.5% in December last year, 3) The federal cabinet approved the Energy Conservation Plan, barring fresh restrictions on wedding halls and markets, 4) Pakistan is eying generating around US$8 billion from the international community and donor agencies for the rehabilitation and reconstruction of the flood-affected people, 5) Finance Minister Ishaq Dar claimed that friendly countries have announced their support.
Sector-wise, amongst mainboard items, Miscellaneous, Refinery and Transport were the top performers. Vanaspati and allied industries, Leather & Tanneries and Cable & Electrical were amongst the worst performers. Flow wise, net selling was recorded by Mutual Funds with net sell of US$2.9 million). Companies absorbed most of the selling with a net buy of US$3.2 million.
Company-wise, top performers during the week were: PSEL, SHIFA, ATRL, PPL, and SNGP, while top laggards were: PSMC, HCAR, KEL, GADT, and GATM.
The market is expected to remain under pressure in the near future, driven by the weakness in the PKR against the US$ and the concerns regarding the country’s fiscal health.
Pakistan will have to repay around US$8.3 billion in shape of external debt servicing over next three months of current fiscal year.
Additionally, the political uncertainty and any developments regarding the 9th review by the IMF would remain in the limelight, which would unlock inflows from friendly countries.
Consequently, the market will remain jittery amid uncertainty over economic fronts. Analysts continue to advise a cautious approach while building positions in the market.
Local cement dispatches for December 2022 were reported at 3.68 million tons, down by 4.8%MoM and 9.4%YoY. Region-wise, North witnessed a steep drop of 12.5%YoY to 2.96 million tons. Richards Bay coal prices continued to decline amidst lower than anticipated heating demand due to milder winters in Europe. At present price hovers at US$180/ton as compared to 2QFY23 average of US$239/ton. With an overall shift in macro-policy focus from growth in previous years to consolidation, analysts expect sector volumes to decline by 17% for FY23. With further hikes in policy rate expected by the SBP (as much as 200bps), this may prove to be further detrimental to the key players. Overall, companies with timely expansions may remain better off in the near term. Analysts continue to advocate LUCK and MLCF on the back of low leverage and better production efficiencies contributing to their margins going forward.
Brent futures have dropped by 9.4% since the beginning of 2023, as demand outlook dampened. Increasing COVID-19 cases in China has led to expectations of the country rolling back the easing restrictions, which would lead to softened demand for crude oil. The WHO has indicated that the country is under-reporting the extent of the spread of the virus and related deaths. FOMC minutes have indicated a higher focus on combating inflation, reversing expectations of an interest rate cut later in 2023. In the event that the FOMC increases interest rates even further, demand outlook is likely to worsen. Easing crude oil prices are a blessing for the country; with a US$5/bbl fall in prices leading to US$1 billion annual saving in the import bill (assuming FY22 quantity imports for crude oil and petroleum products and unchanged international cracking spreads). From the vantage of the equity market, the lower crude oil prices are expected to dampen earnings of OGDC, PPL, POL and MARI.
POL product sales clocked in at 1.335 million tons for December 2022, down by 11%YoY and 14%MoM basis, as compared to 1.51 million and 1.54 million tons during December 2021 and November 2022. On the retail front, MS volumes shrunk noticeably, by 15%YoY during 2QFY23, as increased fuel prices and restricted mobility (floods/rain destruction) dampened the overall demand. GoP is likely to take a major hit in the non-tax revenue as well i.e. PDL, as retail offtakes have decline substantially during 1HFY23, down 19%YoY. Assuming unchanged trends in POL offtakes and similar rates, total PDL collections are expected to end the full year at PkR630.4 billion, an estimated annual shortfall of PkR225 billion. For the full year, analysts expect industry offtakes at 19.1 million tons for FY23, down by 15%YoY from previous estimate.