Index rises; political uncertainty likely to persist
The week ended on June 02, 2023 witnessed positive movement in the first two days, turned bearish on Wednesday, but closed the week on a positive note. The benchmark index gained 388 points to close at 41,353 points, a paltry gain of 0.95%WoW.
Participation in the market remained strong, average daily trading volume grew to 180.3 million shares from 117.7 million shares a week ago, an increase of 53.1%WoW. On the IMF front, uncertainty continues to linger as talks of Pakistan and the IMF going their separate ways continued to linger.
However, rumours were clarified by Minister Aisha Ghaus Pasha, expressing that the incumbent government is committed to the IMF programme.
SBP held reserves eroded by US$102 million due to external debt payments, to US$9.09 billion as of May 26, 2023. PKR depreciated by 0.18%WoW to close the week at PKR285.68/US$.
Other major news flows during the week included: 1) sales of petroleum products plunged by 40% in May amid economic slowdown, 2) cement sales rose 9% in May, signaling an uptick in construction, 3) FBR collection remained PKR62 billion short of PKR621 billion monthly target, 4) GoP borrowed PKR2.286 trillion through treasury bills auction, 5) Price of petrol and diesel reduced by PKR8 and PKR5 respectively, 6) World Bank approved US$213 million financing for flood affected.
Sector-wise, Synthetic & Rayon, Close-end Mutual Fund, and Sugar & Allied Industries were amongst the top performers, while Textile Weaving, Property, and Food & Personal care products were amongst the worst performers.
Flow-wise, major selling was recorded by Mutual Funds with a net sell of US$3.19 million. Brokers absorbed most of the selling with a net buy of US$1.93 million.
Top performing scrips during the week were: CEPB, INIL, HGFA, DGKC, and PIBTL, while top laggards were: GATM, JVDC, UPFL, HMB, and FHAM.
Market is expected to remain range bound in the near future and the upcoming federal budget on June 09, would dictate the market direction.
As evident with the recent happening on the suggested tax on retained earnings profit, followed by announcements of EOGMs by companies to increase authorized share capital.
Analysts advise investors to take a cautious approach while building positions in the market and continue to advocate the stocks with dollar-denominated revenue streams (Technology and E&P sector), to hedge against the currency risks or companies with healthy forward dividend yields.
Meeting of Monetary Policy Committee (MPC) of State Bank of Pakistan is scheduled on June 12, 2023. In order to gauge the view on monetary policy outlook, Topline Securities conducted a poll of key market participants on expectations over policy rate and key macro estimates.
As per the survey, majority of the participants (69%) expects no change in policy rate. 23% participants expect increase in policy rate. Out of these, 16% participants expect a 100bps increase, and 7% participants expect above 100bps increase. 8% of participants expect a decline in policy rate.
In response to the question on IMF 9th review, 42% participants expect an extension in IMF program, while 40% participants expect IMF funding will not materialize and 18% of the participants expect an agreement with the IMF Board approval before Jun 30, 2023.
Responding to question on where you see Policy Rate by June 2024, 69% of the participants anticipate policy rate to be between 16-20% of which 37% participants expect policy rate to be between 16-18% and 32% expect policy rate to be between 18-20%. 16% of the participants anticipate policy rate to be between 20-22%. On the other hand 10% participants expect policy rate to be below 16% and 5% of participants expect policy rate above 22%.
The brokerage house anticipates monthly CPI inflation to soften from June 2023 and gradually decline over the next 12 months mainly because of base effect along with tight monetary and fiscal policy. Petrol and Diesel prices are also down by 7-12% last month. This will also ease inflation in coming months, unless there is any major pressure on PKR. Considering above factors, we also expect no change in upcoming MPC meeting.
Volumetric sales of petroleum product increased by 11%MoM to 1.3 million tons in May 2023, mainly led by higher HSD sales that surged by 18%MoM owing to Kharif sowing season, as against this, petrol sales increased by 4%MoM. However, on a YoY basis, overall demand plummeted by 40%, plunging 11MFY23 volumes to 15.2 million, down 26%YoY. Smuggling of HSD from Iran, elevated oil prices amid petroleum levy and PKR depreciation, and overall slowdown in economic activities have weighed heavily on petroleum product demand.
HSD volumes surged by 18.3%MoM, but were down 36%YoY to 0.5 million tons in May 2023, taking total sales in 11MFY23 to 5.8 million tons, down 29%YoY. On a MoM basis, demand rebounded on the back of higher agriculture activities amid Kharif sowing season. However, higher demand is not fully commensurate with volumetric sales due to massive smuggling of HSD from Iran which shifted a significant percentage of total local demand to Iranian diesel amid lower cost. On YoY basis, HSD demand slipped by 36%, on smuggling and overall economic downturn, coupled with elevated diesel prices.
Looking ahead, it is believed that the demand of petroleum products in Pakistan is likely to remain sluggish due to macroeconomic weakening, lower automotive sales volumes, continued smuggling of HSD from Iran, and possible imposition of GST to meet the revenue target set by the government. That said, we may witness some respite in demand post recent reduction in HSD and MS prices locally.