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Sentiments remain down; caretaker govt and poll announcements may guide

The political noise increased once again after a controversial statement by former prime minister Nawaz Sharif coupled with looming macro instability dampening investors’ sentiments. For the week ended 18th May, the benchmark Index of Pakistan Stock Exchange (PXS) closed at 41,624 points, down by 4.52%WoW. Average daily traded volumes also shrunk by 31.34%WoW to 114.91 million shares. The volume leaders were FCCL, BOP, KEL, PAEL and TRG.

Key news flows impacting the market during the week were: 1) Brent oil prices rose above US$80/bbl for the first time since November 2014, on strong demand and looming US sanctions against Iran, 2) as per recent SBP data, Pakistan’s external debt reached close to US$92 billion or 30.8% of GDP, reflecting an increase of US$8.3 billion during first nine months of current financial year, 3) total foreign exchange reserves of the country reduced to a little more than US$17 billion, 4) the ECC committee approved policy guidelines for OGRA to enhance the Unaccounted for Gas (UFG) benchmark and 5) the Government of Pakistan announced extension of export incentive package beyond June 2018.

Performance leaders during the week were: MCB, APL, OGDC, ABL and HASCOL; while laggards included: 1) LUCK, PSO PIOC, DGKC and ENGRO. Foreigners continued to off-load their holding during the week, with US$19.97 million outflow compared to US$4.13 million last week. Market is likely to take direction from announcement about the caretaker government and date for holding general election. That said, the banking sector can gain traction in anticipation of a rate hike in the upcoming MPC meeting while the hike in international crude oil price oil to 3.5 year high can keep the E&P sector in the limelight.

Any hike/decline in crude oil prices has profound impact on Pakistan’s economy, particularly balance of payment and rate of inflation. Lately, the country has benefited from low oil prices resulting in high GDP growth rate on the back of CPEC related projects. The recent resurgence in oil prices to its 3.5 tear high calls for a review in macro assumptions. Some analysts believe oil prices are likely to hover around these levels (Arab light to average at US$70/bbl as compared to US$60/bbl earlier. The hike is driven by geopolitics, particularly re-imposition of sanctions on Iran. In this backdrop, analysts believe that the central bank is likely to take a more hawkish stance in setting the policy rate.

Additionally, pressures on the external account are likely to remain elevated in the upcoming year. Looming macroeconomic headwinds can potentially dampen the positives arising out of growth momentum and can give rise to a defensive investor mindset. In this regard, sectors like banks (anticipation of rate hike), E&P (uptick in profitability), energy (US$ hedged) and export revenue based sectors should thematically be considered to counter market volatility.

 

Pressures on the external account are likely to remain elevated where current account deficit is likely to be recorded around 5% of GDP, breaching the government’s target of 4.0%. This is despite incorporating healthy growth in exports, gradual reduction in furnace oil imports and slowdown in machinery imports growth. The imbalance will be driven by higher oil import bill. Consequently, this is likely to restrict SBP’s ability to maintain PKR /US$ parity at these levels with potential 4.5% depreciation in FY19 considering outflows such as redemption of US$ one billion Eurodollar Bond and US$617million payment to the IMF scheduled for FY19.

During April 2018 total industry sales by auto assemblers rose to 26,550 units, bolstered by impressive passenger car sales and continued uptick in LCV and pickups offtake. Cumulative 10MFY18 industry/car sales exceeded FY17 sales. During the period, 35,359 LCV and pickups were sold, up 64.6%YoY, the highest sales ever during the period (10MFY18 sales matching previous high of FY16 annual sales of 36,350 units). 1000CC segment remained the bulwark for passenger car sales growth followed by 800cc and below, while 1300cc & above segment was holding steady. Cumulative segment distribution showed passenger car consumers favoring PSMC’s recent offerings. A look at robust sales of LCV and pickups indicates that PSMC stands in a firm position to leverage 1000cc and below segment dominance as well, where its newer models are benefiting from higher re-sale values, an indicator of positive buyer sentiments pertaining to quality, mileage and to some extent brand value. PSMC sold 14,781 units during April’18 and the rise was pushed by Wagon R/Ravi/Bolan sales and last year’s leader Cultus, where last year was a pre-model launch low-base). Mehran/Swift sales provided stability closing out a product slate that is entirely in the green. Cumulative sales for the OEM have crossed 122,075 vehicles up 32%YoY, closest to the OEMs highest ever full yearly sales of 127,785 units in FY16, in a year without any external propellants. INDU sold 52,610 units, though up 2.4%YoY was marred by 5%YoY decline in Corolla sales, on track to a FY18 target of 52,700 units. Moreover, on a consolidated basis, Fortuner/Hilux sales grew as their product upgrades continue to garner robust demand in any pre-election buying spree.

An analysis of cumulative passenger car/LCV segment sales from FY06-17 shows that the growth in sales for 10MFY18 vastly exceeds the historic average for both segments.

Additionally, OMEs have entered the fifth consecutive year of YoY growth, exceeding the last cycle of growth (10MFY10-12) and beating the six-year growth cycle witnessed in FY02-07. In this backdrop, the weakness in auto sector price performance is a factor of dampeners which we believe are misplaced. PSMC stands in a firm position to leverage 1000cc and below segment dominance as well, where its nascent models are benefitting from higher re-sale values, an indicator of positive buyer sentiments pertaining to quality, mileage and to some extent brand value.

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