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Banks, fertilizer help index gains 951 points; political euphoria likely to dominate

The benchmark index of Pakistan Stock Exchange (PSX), gained 951 points during the week and closed the week ended 22nd July 2018 at 41,222 level. Gains seen during the week was mainly on the back of attractive valuations with interest in Banking and Fertilizer stocks. Banking stocks continued the rally from end of last week and contributed 279 points to the Index since the latest MPS. Similarly, increase in the prices of cement and urea scrips during the week also helped push Cement and Fertilizer sector prices higher.

Significant increase was observed in volumes during the week, with an average trading of 219 million shares as compared to 131 million shares a week ago. Similarly value traded rose to US$66million on average as compared to US$49million in the preceding week.

During the week, foreigners remained net sellers to the tune of US$22.1million as against a net selling of US$26.6million seen during same period week ago. However, on the local front, Insurance companies and Individuals remained net buyers of US$13million and US$9.8million respectively, whereas Banks emerged as net sellers of US$9million during the week.

Important news driving the market included: 1) Ghani Glass (GHGL) has notifying PSX that the company’s container glass furnace having production capacity of 50 tpd of Landhi plant, has been successfully fired after necessary BMR, 2) Engro corporation (ENGRO) notifying PSX regarding the proposed sale of up to 29% of the issued and paid up share capital of ETPL by ECORP to VOPAK in terms of the share purchase agreement executed by and between ECORP and VOPAK as of 19th July, 2018, 3) Power generation in the country growing by almost 12% to 120,539Gwh in the last fiscal year (FY18) as compared to 107,858 Gwh generated in the previous year. Electricity generation increased 12% to 12,914Gwh during June 2018 over 11,458Gwh in June 2017. Hydel generation turned out to the highest contributor following the induction of Neelum-Jehlum and Tarbela 4th extension in the system, 4) liquid foreign exchange reserves held by State Bank of Pakistan (SBP) decreased by US$416million during the week ended 13th July, 2018 to US$9.1billion. The total liquid foreign reserves held by the country were reported at US$15.7billion. The net foreign reserves held by commercial banks were reported at US$6.6billion and 5) the country’s current account deficit swelled by 43% to highest-ever level of US$18.0billion during the fiscal year ended 30th June, 2018 as compared to US$12.6billion in the preceding financial year.

The current account deficit increased to 5.7% of GDP in FY18 as compared to 4.1% in FY17. In June alone, current account deficit amounted to US$1.8bn as compared to US$2.0billion in May 2018. Pakistan’s borrowing from foreign sources hit a record high at US$11.4billion in FY18, due to the heavy reliance on external creditors grew due to mounting debt and a steep decline in foreign exchange reserves.

 

The top gainers were: UBL, MLCF, NCL and ASTL, while laggards included: NBP, PSMC, FFBL and GWLC. With General Elections 2018 scheduled for 25thJuly, 2018, political euphoria is likely to dominate the weak market movement.

Average daily trading may shrink with investors staying on sidelines till election results. Post-election, market remains unclear with no party likely to attain absolute majority. There are also forecast that political parties may get majority in provincial assemblies but to form government at the national level a lot of negotiations will be required paying way for the ‘power brokers’ to attain upper hand.

Current account deficit for FY18 reached record levels of US$18.0billion breaching its previous high of US$13.9billion in FY08, though in relative terms it remains significantly lower at 5.7% of GDP as compared to 8.2% in FY08. Reflecting growth of 42.6%YoY from US$12.6billion in FY17, the higher deficit is primarily a function of growing trade imbalance, up by 16.5%YoY, while tepid remittance inflows, marginally up 1.4%YoYremained key negative. Going forward, external account weakness is likely to persist in FY19 where deficit is estimated to remain high, around 5.5% of GDP.

Despite expectation of hefty growth in exports, above 10%YoY in FY19, imbalance is being driven by higher oil import bill expected to grow by 20.0%YoY in the ongoing financial year and staggered machinery imports. Additionally, lack of support from remittances will be an added burden on current account stability. This along with sizable debt repayments, estimated at US$7.5billion, is likely to push gross external financing at US$21.8billion in FY19. Keeping in view the precarious economic situation, the next government will have no option to approach lender of last resort, International Monetary Fund (IMF).-

Interest rate hike in the confluence with an unexpected currency adjustment took toll on the market with the KSE-100 index losing 1.5% in market capitalization. Economic concerns pertaining to the escalating external imbalance and consequent plunge in foreign exchange, reserves, widened fiscal deficit breach and caused buildup of inflationary pressures that forces the country to approach IMF later than sooner. The recent round of devaluation marks the fourth currency adjustment in the last eight months where analysts expect further volatility until IMF bailout is guaranteed. In this backdrop, analysts expect currency devaluation to emerge as a key investment theme benefitting exporting (Textiles and IT) and dollar hedged (IPPs, E&Ps) sectors. As an extended advantage, Commercial Banks should also stand to benefit from consequent increase in interest rates while Cements, Fertilizer, Pharmaceuticals and Autos are expected to suffer on higher input costs.

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