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SUSTAINABLE RECOVERY UNLIKELY AMID LACK OF TRIGGERS, VOLATILITY

Pakistan Stock Exchange (PSE) witnessed volatility throughout the week ended 16th June 2017. Its benchmark index posted a decline of 5.4%WoW, wiping out gains made a week ago. Daily trading volume rose by 6.73%WoW to 255.5 million shares. The most remarkable news of the week was passing of FY18 budget by the National Assembly in the absence of opposition, which decided to walk out. The key news of the week impacting the stock marker were: 1) PSX completed the book-building process related to its 20% stake in an overextended 5‐day period at the floor price of Rs28/share, 2) ADB approved US$300 million loan for Pakistan’s power sector with another US$300 million loan expected to be approved in few days, 3) remittances increased by 3.8% YoY/21.4%MoM to US$1.87 billion in May’17 while trade deficit widened and 4) total car sales increased by 2.5%YoY to 155,900 units in 10MFY17. The ongoing deliberations of JIT on Panama case will likely keep investors on the edge. Sustainable recovery remains unlikely amid lack of triggers and shortened days in Ramazan ahead of Eidul Fitr holidays.

The current fiscal year ends on 30th June 2017 and Balance of Payment appears far from satisfactory. While imports are on the rise, exports remain under pressure. On top of all, remittances, a major source of foreign exchange, also remain subdued. This raises fears that the country would be once again forced to approach the lender of last resort, International Monetary Fund (IMF), sooner than later. A recent report released by the State Bank of Pakistan (SBP) indicates that the total liquid foreign reserves held by the country decreased by US$410 million to US$20,157.8 million on 09th June 2017. The break-up shows that the reserves held by SBP amounted US$ 15,296.3 million and net reserves held by commercial banks were US$4,861.5 million.

Despite the best efforts by the Government of Pakistan to facilitate the urea manufactures to contain prevailing glut, prospects of exports remained bleak. A positive point was an increase in domestic offtake in April 2017 to 249,000 tons as compared to 213,000 tons in April 2016 largely on account of subsidy continuation. DAP sales on the other hand registered a decline of to 95,000 tons during the month under review. On a cumulative basis, total fertilizer sales posted growth of 18%YoY to 1.98 million tons during 4MCY17. Slower fertilizer offtake along with industry’s weak pricing power and rising urea inventory estimated around 1.67 million tons. The prevailing situation is likely to keep quoted prices of shares of fertilizer companies under pressure, due to the subdued earnings.

Textiles and clothing export contribute over 60% in Pakistan’s exports. During the ongoing financial years textiles and clothing exports have remained subdued. Therefore, the manufacturers and sectors analysts expected some incentive in FY18 budget. Despite widening trade deficit, the focus on export-oriented sectors was missing. While relief measures under export package were extended and new protectionist measures were introduced no solid initiatives were offered with regards to energy subsidy and refund claims. Moreover, the 1% increase in GST on retail sales to 6% further add to the woes of industry players having a higher proportion of local sales. On the positive side, the government has proposed 10% GST on import of fabric and 5% Regulatory Duty on the import of filament yarn to protect the local industry competitiveness. Initiatives like cotton hedge trading, brand development fund and online B2B and B2C portal are also encouraging.

Keeping in view likely boost in construction activities due to CPEC, local cement manufacturers have embarked upon massive expansion. This demands keeping a closer eye on the domestic offtake and exports. One dependable source of of data is All Pakistan Cement Manufacturers Association (APCMA). Its May 2017 report shows that dispatches during May 2017 grew by 3.7%MoM/2.4%YoY, primarily due to the double digit growth in domestic offtake to 3.39 million tons. However, exports declined by hefty 44.6%YoY to paltry 309,000 tons. Domestic offtake is likely to remain subdued in June due to Ramazan, but pick up momentum subsequently, till the beginning of the winter season in the northern parts of the country. The expectation are based are hinged on: 1) increased construction activity due to higher PSDP allocation of Rs2.1 trillion in the FY18 budget in the backdrop of election year and 2) impressive growth in private sector borrowing for the construction related activities.

According to an AKD report automotive industry’s total sales for May 2017 reached 21,624 units due to the increase in sale of light commercial vehicles and passenger cars. Higher sales were driven by the increase in production. Monthly capacity utilizations of OEMs remained high. Outlook for premium 1300CC+ category remains robust, with news flows about delayed production plans for new entrants prolonging present dynamics in favor of incumbents. Cumulative 11MFY17 total industry sales, including trucks and buses was at a relatively tepid 205,564 units, creating hope that full year sales will exceed 225,000 units. Higher growth was witnessed in tucks/buses segment that contributed 7,907 units to total sale. Car sales grew due to higher sales by HCAR, whereas other companies witnessed a decline in volume. Segment wise sales of 1000CC/1300+CC were up 33.8/9.0%YoY, whereas the 800CC and below class witnessed 15.8%YoY decline during 11MFY17.

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