In the wake of widening external deficits, dwindling reserves and uncompetitive exports in the back drop of political uncertainty, the million-dollar question that arises is where to invest in 2018? Well, definitely not the Bitcoins, at least till the time it is recognized as a currency. While the economic managers are still busy understanding the sector-wise impact of the recent fall in the rupee’s value, meanwhile, investors keep themselves away from taking long-term positions in stocks. Even foreign investors, whom everyone expected to swoop in to pick up stocks in the event of rupee depreciation, have continued to keep their wait and watch policy.
Although specific stocks from various sectors should have shown a significant price change (either way) from when the rupee first started to slide, the overall impact has been diluted by the market meltdown on political uncertainty in the country, which has eclipsed all other factors, including the depreciation. Against the entire year sale of equities worth $339 million in 2016, figures released by National Clearing Company of Pakistan Ltd (NCCPL) show a net outflow of $494million since January, with no major new buying after the recent depreciation.
In light of the above and considering the fact that 2018 is the year of elections in Pakistan, investors may weigh their options based on the pros and cons being offered by following sectors:
Oil and gas exploration
Since oil and gas prices in Pakistan are benchmarked to global crude oil prices which are on the rise, the depreciation would lift the rupee-based oil prices and hence the revenues and profits for the companies will increase.
Oil marketing companies
The margins of oil marketing companies (Pakistan State Oil, Attock Petroleum, Hascol Petroleum and others) are fixed in absolute rupee terms for retail fuels (petrol, diesel, etc.) With depreciation, retail-level oil prices would climb, but absolute margins would not. This will result in lower gross margins. Oil marketing companies may also have to book one-time exchange losses due to depreciation on payables to foreign suppliers and foreign loans.
Gas marketing companies
The rupee depreciation does not directly impact gas companies. However, it would increase the gas prices while the government may defer increase in consumer/industrial (selling) gas prices due to upcoming elections. As a result, gas companies’ receivables from the government will rise and hence exacerbate its cash flow problems.
The returns for independent power producers are fixed in dollar internal rate of return. So, depreciation would have a positive impact on the companies’ profitability. However, it may be partially neutralized by a potential rise in circular debt as a result of depreciation (due to an increase in energy prices).
The price of coal (particularly of imported coal), would increase. The impact would be partially neutralized by cement exports which are denominated in dollars.
Textiles and leather
The sectors would be lead gainers as they are largely export-driven. The rupee depreciation would increase revenues, pricing power and profitability of companies.
It would increase the prices of competing imported goods. Companies relying on domestic manufacturing, such as Nestle, Unilever, Bata and others would be better placed to increase their market share and margins as imported goods become more expensive.
Since these firms rely largely on imported raw materials, the rupee depreciation would increase costs, which may be difficult to pass on to consumers given the stringent regulations.
The deprecation would increase the cost of imported parts for auto assemblers. Assemblers have the pricing power to pass on the cost to consumers by increasing selling prices. Over the long term, as new players KIA, Hyundai, Nissan, etc. come in, the pricing power would reduce substantially.