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Positivity returns but may short-lived over new political outcome

Despite prevailing political uncertainties, the benchmark Index of Pakistan Stock Exchange (PSX) managed to close in positive zone at 42,913 points, up 1.9%WoW. The impact of positive news was partially offset by the delay in the announcement of interim setup and rising concerns if the general elections would be held on time and which party would gain majority. There are growing fears that no single party would be able to form the government alone. Another serious concern is mounting current account deficit. During the week ending 25th May 2018, foreign exchange reserves of Pakistan were reported US$16,406.8 million. The reserves held by State Bank of Pakistan (SBP) were reported at US$10,033.8 million and net foreign reserves held by commercial banks were US$ 6,373 million. A point to be noted is that the reserves held by SBP decreased by US$286 million due to external debt and other official payments.

The key news flows impacting the market during the week included: 1) National Assembly completed its five-year term on 31st May, 2) former Chief Justice of Pakistan, Nasirul Mulk named as caretaker Prime Minister, 3) Election Commission of Pakistan fixed 25th July 2018 for holding of general elections, 4) Pakistan borrowed US$9.6billion from external sources during 10MFY18 of which US$1.6billion fresh foreign loans were acquired during the month of April alone, 4) the ECC of the Cabinet approved a package of five-year tax exemptions and a number of other incentives for former tribal region under federal and provincial administration and 5) the FBR disbursed sales tax refunds to traders and exporters amounting to Rs31.3billion during the final hours of the outgoing PML-N government.

Gainers of the week included: NML,ASTL, PSO, and NCL and losers were: PIOC, MLCF, HUBC, and UBL. Average daily turnover was reported at slightly more than 119 million shares and the volume leaders were: PAEL, TRG, BOP and PIBTL. The developments on the political front and subdued investors’ sentiment in the near terms are likely to keep the market lackluster, lower daily trading volumes and likely selling by the foreign investors.

The month of May 2018 was an extension of the prevailing bearish sentiments at the bourse with the benchmark index losing 5.8%MoM. Looming macro headwinds (vulnerabilities on the external front) amid lingering political uncertainty kept the market under pressure with investors taking discreet notice of a populist budget and higher oil prices. Interest rate hike by the central bank also failed in providing any impetus. Volumes remained visibly low, indicating sheer lack of interest from both institutional and individual investors while shorter trading hours in Ramazan further capped trading activity. Sector wise performance remained subpar with none of the key sectors closing the month in green. June is going to be another eventful month, ahead of elections 2018, with politics dominating the headlines. In this regard, key developments to track include: 1) outcome of the corruption references filled against Sharif family, 2) setting up of the provincial caretaker governments, 3) pending litigation surrounding legitimacy of delimitation bill and 4) Balochistan Assembly passing a bill to delay the polls. In addition to that the decision pertaining to Pakistan’s inclusion in FATF in the upcoming meeting on 24th June is also likely to keep the market under pressure.

 

In the latest Monetary Policy Announcement, it was decided to increase the policy rate by 50bps to 6.5%, which raised discount rate to 7.0%. Despite headline inflation remaining contained at average 3.8% in 10MFY18, rate hike came primarily on the back of upswing in core NFNE inflation in April recorded at 7.0%YoY as against an average of 5.6%YoY in 10MFY18. This reflected buildup of inflationary pressures within the economy. Additional catalyst supporting the hike were said to be: 1) rising current account deficit to US$14billion (up 50%YoY) accompanied by absence of foreign flows, 2) risk of economy being overheated and 3) recovery in commodity prices.

Analysts still see room for more rate hikes in FY19 keeping in view the rising inflation as well as elevated external account pressures, current account deficit for FY19 is estimated above US$16 billion.

According to a report by Topline Securities, Pakistan’s cement industry dispatches are expected to grow by paltry 2% YoY during the recently concluded month of May. This will be the lowest YoY growth recorded in FY18, mainly due to the subdued local demand. On monthly basis, volumes are expected to fall by 11%. Despite this, capacity utilization is expected to remain above 90%.Local sales are likely to remain almost flat YoY after witnessing average growth of 19%YoY in last 10 months, which can be attributed to the month of Ramazan during which construction activities usually slowdown.

Exports are also expected to remain around 400,000 tons during May 2018, to post stellar growth of more than 30%. Higher exports from LUCK and ACPL’s new cement line in Southern region continue to support this growth as sea exports are expected to exceed 200,000 tons, up by more than 100% YoY, which can be attributed to the recent depreciation of Pak rupee. Reportedly cement dispatches during 11MFY18 are expected to grow by 13% thanks to a robust 15% increase in local sales which remains better than the forecast at the start of the year.

This should take capacity utilization of the industry to 94% during the period under review. However, local cement demand is likely to remain weak in the following month on the back of Ramazan and Eid holidays. The brokerage house anticipates cement consumption to remain below 4million tons in June 2018. Despite the recent increase in cement prices, in an attempt to pass on the increase in FED and higher input costs, concerns remain over price sustainability. Last year manufacturers were able to initially pass on the FED impact, which was later on reverted in Northern region.

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