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Market volume posts a 7-year plunge; news of interest rates keep investors nervy

During the week ended 12th July 2019, the benchmark index of Pakistan Stock Exchange (PSX) lost 518 points and closed at 33,672 points, down 1.5%WoW. Trading activity remained immensely dull as average volumes during the week fell to around 51 million shares. It is pertinent to note that the volumes in the outgoing week were lowest in the last 7 years (last reported lowest number was 28 million in January 2012). Investors preferred to remain on sidelines primarily due to uncertainty about the market support fund due to the ceiling imposed by International Monetary Fund (IMF) on the guarantees to be issued by the Government of Pakistan (GoP), coupled with a possible hike in the policy rate in the upcoming Monetary Policy announcement scheduled on 16th July 2019. Increase in fertilizer prices created some positive sentiment for the sector and brought it amongst the top performers, while majority of other sectors remained dreary, in line with the overall sentiment.

The total liquid foreign exchange reserves of Pakistan were reported at US$14,259.3 million on 5th July 2019. The break-up indicated, reserves held by the State Bank of Pakistan (SBP) at US$7,083.6 million and net foreign reserves held by commercial banks at US$7,175.7 million. During the week under review reserves held by SBP decreased by US$189 million to US$7,083.6 million due to payments on account of external debt servicing. On 9th July 2019, SBP received the first tranche from IMF amounting to US$991.4 million, after which SBP’s reserves increased to US$8,035.5 million.

The key news flow during the week included: 1) State Bank of Pakistan (SBP) receiving slightly less than US$ one billion from International Monetary Fund (IMF) as the first tranche of bailout package, 2) IMF also releasing a detailed plan for Pakistan highlighting key benchmarks which included quarterly adjustments of electricity tariff and increase in tax revenue by Rs1.5 trillion in FY21 and Rs1.31 trillion in FY22 among other things, 3) White House confirming that US President Donald Trump will meet Prime Minister Imran Khan at his office on 22nd July and their talks will focus on strengthening bilateral cooperation, and 4) the GoP and fertilizer industry agreeing on hike in urea prices by Rs110/bag.

Key performers of the week included: FFC, APL, CHCC and EFERT, whereas laggards during the week were: DGKC, PSMC, HASCOL and MLCF. Volume leaders at the main board included: MLCF, KEL, LOTCHEM and TRG.

Automobile sector witnessed an erosion of 6% in sales that can be primarily attributed to a news item highlighting HCAR & INDU have decided to cut down their production by 20 to 25 percent owing to subdued demand. According to the latest data about automobile, passenger car sales posted the highest decline in the last 6 years, which also added to the investor’s concerns. Based on NCCPL data, foreigners remained net buyers to US$5.9 million. As against this, Mutual Funds remained net seller of US$5.3 million.

Regulatory actions are likely to keep the investors jittery moving forward. However, the focus will be on Prime Minister’s upcoming visit to the US which, if successful, can provide some impetus to the market. Governor, SBP is scheduled to announce monetary policy for next two months on 16th July 2019. Analysts expect a hike of up to 150bps, which is expected to increase pressure on the already lackluster stock market.


Gravity of a weak economy impacted auto sales during June 2019, with automotive industry sales slipping to 16,288 units, down 11%MoM and 15%YoY respectively. For the full year aggregate sales were reported at 245,724, down 9%YoY. Major constituents of total industry sales for FY19 posted decline for Passenger (5%YoY) Cars/Trucks (5%YoY) and Tractors (29%YoY) and LCVs and Pickups (21%YoY), mostly due to rapidly rising prices, adverse regulatory measures by the GoP, falling disposable incomes (hindered by petrol prices, cost of borrowing) effectively deflating consumer durable demand.

Segment-wise sales composition in the passenger car segment confirm the trend of relative resilience in premium segment sales (1,300CC+ segment sales up 2%YoY), with mid-segment sales showing strong growth (1,000CC sales up 11%YoY, mostly from the new model effect) as the small segment sales slag (800CC sales dropped 27%YoY). Bearish sentiment prevailing in the wider market squeezed auto sector valuations, forcing attractive levels, despite wider questions over organic demand growth, medium term competitive environment and pricing power of OEMs following drastic price hikes (25% to 40%YoY rise during June 2018 compared to June 2019).

Analysts believe INDU to remain a high quality offering, with its blend of demand growth from premium SUV offerings, sturdy margins in sedan segment and cash heavy balance sheet augmenting robust competitive moats, arguably the best placed to weather competitive pressures.

Pakistani banks closed FY19 with total deposits at Rs14.4 trillion, up 10.7%YoY as compared to 9.0%YoY recorded in the earlier financial year. Deposits surged by Rs961 billion during the last few days of June 2019 that could be attributed to asset declaration scheme but year-end phenomenon also likely played its part.

Analysts expect relatively slow single digit growth of 9% (CAGR) in deposits over CY19-21 as compared to 12.8% in CY15-18 owing to: 1) higher interest rates impacting money supply and 2) government restricting its borrowings from the central bank. The big-5 can leverage their wide branch network to maintain deposit growth. Amongst mid-tiers, MEBL and BAHL look to realize higher deposit growth due to recent aggressive branch expansion. BAFL’s consolidation efforts could dent its deposit growth. The likely trend could emerge from: 1) banks doing-away with ‘selected deposit’ strategy, and 2) potential switching from Saving Accounts to Fixed Deposits in a high interest rate environment.

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