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Market ends smidgen lower, sufficient financing policy may lure buyers

Lack of coherent policy direction to address the macro-economic woes continued to weigh on stock market performance. During the week ended 28th September 2018, the benchmark index of Pakistan Stock Exchange (PSX) closed at 40,999, about half a percent low as compared to a week ago. NEPRA’s proposal to increase the electricity tariffs, which was later deferred by ECC until next week, dampened the market sentiment.

Average daily trading volume declined by whopping 20% to 124 million shares. The volume leaders of the week were: UNITY, DCR, TRG, KEL and LOTCHEM. Major gainers included: PIOC, HBL, POL, PSMC and NBP. On the flipside, laggards were: ASTL, INDU, APL, DGKC and MLCF. Foreigners continued to offload their stakes in domestic equities, with net outflow of US$9.43 million during the week under review.

The news flow impacting the market were: 1) foreign exchange reserves held by the central bank declined by more than 3.%WoW to a little above US$9 billion – a level last seen before China extended loan of US$2 billion, 2) Pakistan and Russia signed a ‘memorandum of understanding’ on implementing US$10 billion offshore gas pipeline project, 3) Saudi Arabia signed grant agreement with Pakistan to finance three infrastructure and energy projects under the umbrella of CPEC, 4) international ratings agency Fitch estimated a slowdown in Pakistan’s GDP growth to 4.7%YoY during FY19 owing to external imbalance and monetary tightening and 5) State Bank of Pakistan (SBP) highlighted that the factors such as external sector pressures, fiscal vulnerabilities, buildup of price pressure and volatile commodity market pose potential risk to financial stability. Delay in arranging sufficient financing inflows in the backdrop of sharp drawdown in country’s foreign exchange reserves, at an average SBP reserves declining by US$297 million per week, is likely to keep the market sentiment under pressure.

Pakistan’s current account deficit for August 2018 posted a steep decline of US$1.52 billion as compared to that of July 2018 to settle at US$600 million, primarily on the back of imports declining by 18.7%MoM. This narrowed the trade deficit to US$2.4 billion, down by 31.7%MoM. As against this, exports inched up by 3.9%MoM on the back of uptick in manufactured goods. The decline in imports can be attributed to a significant reduction in energy products, down by 23.5%MoM and machinery, down by 18.3%MoM. While challenges remain during the ongoing fiscal year, analysts estimate deficit to remain around 5.4% of GDP primarily due to rising international crude oil prices.

According to the latest data released by NFDC, total fertilizer/urea offtakes for August 2018 recorded declines of 47%YoY and 55%YoY to 617,000 and 431,000 tons respectively. The steep decline in fertilizer sales can be attributed to high base effect, where August 2017 numbers were abnormally high due to ambiguity surrounding fertilizer subsidy and anticipated increase in urea price. DAP sales remained muted at 79,000 tons, down 4%YoY and 74%MoM, owing to seasonal slowdown. Despite this significant monthly slowdown, total fertilizer/urea sales posted nominal minimal declines of 6% and 8%YoY respectively during 8MCY18 due to 4% and 6% increase in offtake during Jan-July 2018 period. Lackluster urea offtake resulted in inventory buildup by 45,000 tons to 131,000 tons, up 52%MoM in August 2018 as compared to 86,000 tons recorded in July 2018 that was the lowest level seen during the last 7 years.

 

Reportedly Pakistan’s total exports grew to US$2,016 million during August 2018. Among the major groups, textile and food exports – contributing 80% to total exports – witnessed a strong recovery. Export of both the groups increased by 7.3%YoY and 15%YoY to US$1,258 million and US$302 million. Within the textile group, both high and low value-added exports increased by 27.8% and 19.2%MoM to US$943 million and US$315 million, respectively. Growth in textile exports was primarily on account of diversion of orders particularly in the value chain from Bangladesh, where textile industry workers are protesting against new wage announcement by the government. Going forward, analysts expect single-digit growth in Pakistan’s export of textiles and clothing over the medium term. The sector continues to face structural problems that include: 1) high input cost, 2) unfavorable taxation regime and 3) competition from regional countries. Despite rupee depreciation and continuation of export incentives, analysts remain skeptical about the sector outlook. Apparently, all the macro developments, including government assistance have failed to yield any substantial result. A potential announcement of tariff subsidy, as hinted by Finance Minister, Asad Omar in the mini-budget speech cannot be ruled out.

Pakistan’s cement industry is estimated to post around 3.5million tons of dispatches for September 2018, translating into YoY growth of around 9%. This will likely be supported by stellar performance of exports. However, on monthly basis, analysts expect dispatches to remain almost flat.

Analysts estimate margins on local dispatches to remain during the outgoing month on the back of slowdown in domestic consumption as well as effect of external factors, including holidays and downpour in some parts in North. Monthly exports are likely to surpass 600,000 tons, mainly led by higher clinker sales through sea. Closure of some clinker production lines in China, due to stricter environmental regulation has led to increase in clinker demand in the region. However, analysts believe that exports at these levels may not be sustainable. Cement dispatches for 1QFY19 are expected to register a marginal growth as compared to a robust growth of 15% YoY posted in 1QFY18 mainly because of lower domestic off-take as analysts anticipate local dispatches to decline by 4% YoY, nearly after 7 years. The average retail cement prices in North hovered around Rs595/bag at the end July 2018, declined to Rs556/bag in September 2018. Price declined to Rs530/bag recorded in Rawalpindi.

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