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PSX Records Lowest Level Of 2018; Volatile Trend To Persists

Continuing its volatile trend, Pakistan Stock Exchange (PSX) remained under extreme pressure during the week ended 22nd June 2018. The benchmark Index lost another 2,044 points and closed the week at 41,637 level, posting a decline of 4.68%WoW. This was also the lowest level of the calendar year 2018. Enhanced geopolitical uncertainty arising from fears of trade war between US and China dampened global growth outlook. On top of that the latest downgrading of Pakistan due to dwindling domestic macroeconomic indicators were the top reasons behind the overall poor performance of the market during the week under review. However, with the conclusion of Ramazan, average daily traded volumes increased by 29%WoW to more than 170 million shares.

The top volume leaders included KEL, POWER, TRG, LOTCHEM, and SMBL. Major news that drove the market during the week included: 1) the caretaker Finance Minister announcing that the amnesty scheme announced by the outgoing PML-N government would not be extended beyond the 30th June 2018 deadline, 2) country’s current account deficit surging to US$15.961 billion during 11MFY18, an increase of 43%YoY, 3) Moody’s downgrading Pakistan’s rating to negative from stable, 4) SECP notifying new Anti-Money Laundering and Countering Financing of Terrorism Regulations 2018 to satisfy the upcoming FATF meeting and 5) local urea prices rising to Rs1,600/bag amid looming urea shortage in upcoming months.

Major gainers for the week were: FATIMA, FFC, and EFERT; while laggards included: MLCF, ASTL, HASCOL, HBL and LUCK. Foreign participation went from bad to worse with an outflow of US$24.53 million during the week under review as compared to an outflow of US$4.45 million in the preceding week. The eagerly awaited outcome of OPEC meeting in Vienna scheduled for 22nd June 2018 kept international oil prices volatile. The outcome of the meeting to decide increase in output is expected to set direction of Pakistan market where energy companies enjoy substantial weightage in the benchmark Index. Moreover, any decision coming after the FATF meeting to review Pakistan’s action plan by the FATF meeting scheduled from 24-29 June 2018 would heavily weigh on market. However, institutional investors enjoying ample liquidity can take advantage of attractive valuations after the sizable decline in the share prices witnessed this past week.

 

Moody’s has downgraded outlook of Pakistan’s credit rating to “Negative” from “Stable”, while maintaining country’s rating at “B3” (highly speculative). Prior to Moody’s announcement, Fitch had also downgraded its outlook for Pakistan to “Negative” from “Stable” in January 2018 but maintained the rating at “B”. Standard & Poor’s (S&P) has so far maintained Pakistan’s rating at “B” with “Stable” outlook in recent few months. A similar response from S&P cannot be ruled out in the immediate future where it can potentially downgrade the country’s outlook to “Negative”. Key reasons cited by Moody’s in its review are: 1) deterioration in balance of payments, 2) low foreign exchange reserves, 3) increasing debt burden/repayments and 4) fiscal pressures. Last time Moody’s had downgraded Pakistan’s credit rating in July 2012, where it downgraded both the rating and outlook to “Caa1” (from “B3”) and “Negative” (from “Stable”) respectively. The reasons cited by Moody’s in 2012 were very similar to the reasons stated now. Given this, it may now be expected that Moody’s can potentially downgrade the country’s rating if there is no visible improvement in macroeconomic indicators, which currently stands at “B3”. Moody’s in its review expects Pakistan external account to remain under significant pressure and expects foreign exchange import cover to fall during FY19 with the external financing gap to be largely met by increased foreign currency borrowing, which will add to the country’s debt burden.

To further highlight external account concerns, State Bank of Pakistan (SBP) in a recent announcement, reported Current Account Deficit (CAD) at end May 2018 at US$1.9 billion, which was higher than expectations. For the period July-May 2018, CAD was recorded at US$15.9 billion (up 43.3%) over last year with full year CAD now expected at US$18.0 billion (5.8% GDP) compared to previous year’s CAD of US$12.6 billion (4.2% GDP).

Moody’s has termed the country debt to GDP of over 70% as “relatively high” and has shown concern on the country’s debt repayment capacity given low revenue generation. Moody’s has further highlighted the expanding fiscal deficit that has already exceeded 6% in the 11-month period of FY18.

Despite all the negativity surrounding the banking sector in Pakistan, Bank Alfalah (BAFL) stands prominent. It has exhibited consistent improvement. The bank under its new management continues to focus on: 1) improving credit quality, 2) enhancing its non-interest income base and 3) managing its cost base.

More importantly, steps to address the bank’s inadequacy on the CAR front, a long standing concern, have started bearing fruit resulting in CAR improvement in 1QCY18 to 15.1% (Tier-1 capital issue of Rs7.00 billion completed in Mar 2018). The move should allow the management enough space to maintain focus on growing its core revenue stream by tapping into high-yielding segments, while also being able to maintain dividend payout particularly because it has not been designated for additional capital surcharge levy under the new SBP framework. Its relative immunity to issues faced by peer banks (limited foreign operations, no pension related expense, higher sensitivity to interest rates) alongwith consistent earnings growth should keep the scrip in limelight. BAFL’s 1QCY18 earnings were not short of a surprise – beating market expectations. While peer banks struggled with one-off exogenous charges, the bank continued to depict consistent fundamental improvement, concentrating primarily on: 1) effective cost control, 2) refinement of asset quality, resulting in reversals worth Rs287million during the quarter and 3) growth of 12%YoY in fee base.

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