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Political subjectivity, weak macro indicators keep investors tense; short-term rally likely

The benchmark index of Pakistan Stock Exchange (PSX) continued its downward trend during the week ended 28th December 2018, posted a decline of 2.83% to close at 37,167 level. Investors were left dejected due to several factors this week, including a US$591 million decline in the SBP’s foreign exchange reserves, strong political noise in the country and weak macro indicators.

Sector-wise the worst performers were Commercial Banks, Oil & Gas Exploration companies, Cements and Fertilizers. Selling by foreigners declined to US$1.1 million as compared to US$12.2 million a week ago, it was their 34th week of consecutive selling. Among local investors’, mutual funds were also net sellers of US$6.2 million, while Banks and Individuals were net buyers of US$7.5 million. Total liquid foreign reserves of Pakistan were reported at US$14,017.8 million on 21st December 2018. The break-up of the foreign reserves was: reserves held by State Bank of Pakistan amounted US$ 7,457.3 million and net foreign reserves held by commercial banks at US$ 6,560.5 million. During the week reserves held by SBP decreased by US$591 million to US$7,457.3 million, due to external debt servicing and other official payments. Reportedly, the federal cabinet approved a strategy to issue ‘Panda bonds’ in the Chinese market to raise foreign exchange from global markets. Though the size of the issue has not been announced, the bonds will be denominated in Chinese yuan.

While developments on the political front remained high as the joint investigation team (JIT) submitted its report to the Supreme Court on fake account case, some analysts attributed the decline in the index to the year-end adjustments due to the redemptions in mutual funds as the unit-holders switch to income fund from equities.

Net-selling by Insurance amounted to US$2.19 million that has been providing key support to the market in recent times, followed by Mutual Funds US$6.2 million that was mainly absorbed by Banks US$4.57 million.

Performance wise, top laggards included BAFL, UBL, FCCL, DGKC, and EFOODS, whereas gainer were FATIMA, FFC and APL. Year 2019 is not likely to witness market triggers and news flow pertaining to granular details surrounding an IMF facility and bi-lateral assistance should keep market range bound in the coming week. That said, analysts do not rule out new foreign fund allocations generating a short term upside rally in the market.

The borrowings of the Government of Pakistan (GoP) from the State Bank of Pakistan reached to 12.6% of GDP, the highest since FY06 as against an acceptable limit by IMF is indicated at 7.5-8.0% of GDP, necessitating a shift towards banks for borrowings. The latest PIB auction, though small in amount can be taken as an indicator of the revised strategy. The stock of borrowings from the central bank stood at 10.0% of GDP at the time of entry into the previous IMF program in September 2013, which gradually receded to 9.2% by end FY14, while the share of PIBs as a percentage of borrowings from banks stood at 19.0% at the start of the program, climbed to 53.4% by end FY14. The banking sector is likely to aggressively pursue PIB accumulation and also benefit from rising spread on the longer tenor bonds particularly when fresh yield on advances are bound to fall.

 

It is estimated that the benchmark index of PSX has shed 5.4% during December 2018, marking it the worst December since 2008, with average trading volume stumbling to around 122 million, the lowest in the past 13 months.

Key trigger for bulls to emerge from the sidelines seem to be tilted towards Pakistan’s entry into another IMF program. The rally could be short-lived, evident from historical trends as investors adjust to new realities of deep structural reforms imposed by the Fund. The index heavy weights like Banks (24.7% of index weight) and E&Ps (14.5% weight) could offer crucial support, whereas downside risks are more apparent on cyclical sectors (cumulative weight of Autos, Cables, Foods and OMCs at 12.2%). Banks could gain on the back of interest rate hikes (before concerns on provisioning risks erode upsides, whereas the E&P sector could be led by a recovery in oil prices (from production cuts by OPEC and non-OPEC countries commencing from January 2019) and exchange rate depreciation.

Pakistan’s largest auto assembler, PSMC has remained prominent in news headlines as it angles for incentives reserved for new entrants and brownfield players, effectively using its expansion plan (originally estimated at US$460 million) as a bargaining chip for securing tariff relief. Mapping industry sales over the three major OEMs. The hefty share of PSMCs variants in overall demand plays prominently in its average sales growth and correlations with wider industry cycles. Remaining less resilient and lower than premium players, INDU & HCAR.

The persistent decline of the scrip highlights absence of a coherent long term strategy to increase product offerings, upgrade variants being a precursor to any expansion plan. According to a news report, Vendors from the auto sector are claiming a recession in their sector, which they claim has lost over 12,000 jobs in the last three months, with another 50,000 jobs on the line. But the data for production and sales of automobiles and motorbikes released by Pakistan Automotive Manufacturers Association (PAMA) covering the last five months paints an altogether different picture.

The Hub Power Company (HUBC) in a notice to PSX announced that the company and China Power International Pakistan (CPIPIL) have agreed the valuation and HUBCO now intends to increase its shareholding in China Power Hub Power Generation Company (CPHGC), through its wholly owned subsidiary Hub Power Holdings, from 26% to 47.5%. The increase in shareholding is subject to corporate and regulatory approval in China and Pakistan.

National Bank of Pakistan (NBP) and Bank AlJazira have agreed to work together to increase remittances from the Saudi Arabia through legal channel.

Textile industry urged the government to settle more than Rs100 billion in outstanding sales tax refunds, which are causing serious liquidity crunch for manufacturers and exporters.

Urea and di-ammonium phosphate (DAP) sales have dropped in November 2018 mainly because of high prices but the situation is expected to change with the commencement of Rabi demand.

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