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Market remains dull, but may springs back on improving economic indicators

During the week ended 19th July 2019, Pakistan Stock Exchange (PSX) remained under extreme pressure. The benchmark index lost 1,214 points, or plunged by 3.60%WoW to close at 32,459 level. Market remained under pressure during the first two sessions of the week owing to expected hike in policy rate and finally the central bank raised policy rate by 100bps, taking the rate to 13.25%, the highest in last 8 years. Continuous Monetary tightening by central bank has resulted in lack of fresh participation as investors’ interest is shifting towards fixed income securities, away from equities. E&P sector witnessed the largest erosion in value followed by commercial banks and fertilizer sectors. Towards the end of the week Index took another nosedive after NAB arrested former Prime Minister, Shahid Khaqan Abbasi in LNG case.

Other major news flow affecting the marker were: 1) FDI dropped by 50% to US$1.73 billion in FY19 and hit a five-year low, 2) interest rate was raised to 13.25% by the central bank, 3) current account deficit shrank 32% in FY19 to US$13.6 billion, 4) terming the traders’ recent countrywide strike ‘politically motivated’, the federal cabinet on Tuesday resolved not to withdraw its decision on registration of traders to bring them under the tax net and 5) massive import under invoicing data was detected after a thorough analysis of customs data. Italian oil major ENI, China’s overseas energy unit and two other trading houses are soliciting to supply liquefied natural gas (LNG) to Pakistan in one of the largest tenders worth billions of dollars, the 240-cargo spread over 10-year tenor is estimated around US$5 billion.

Top performers during the week were LUCK and EFOODS, while NCL, NML and PAEL remained the worst performers. Average daily turnover significantly improved to 105 million shares, up by 107%WoW. The rally was led by MLCF, TRG, KEL, PAEL and BOP. Based on NCCPL data, foreigners were net buyers with US$2.27 million. On the local front, Mutual Funds emerged net seller with US$5.4 million.

The market during the upcoming week will be dominated by the result season and visit of Prime Minister, Imran Khan to the United States, beginning on 22nd July 2019. Investors are advised to take a longer term investment perspective as the market is expected to rebound with improving economic indicators. Banks, E&Ps, Power and OMCs are likely to remain preferred sectors amid the dynamics on macro level.

In a preemptive move, the Monetary Policy Committee (MPC) has raised the policy rate by another 100bps to 13.25%, accommodating expected inflationary pressures arising from recent Rupee depreciation, fiscal imbalances and utility rate adjustments. Interestingly, the Monetary Policy Statement carries a pretty ‘dovish tone’, signifying the tightening cycle reaching its peak. The same is also evident from rather soft inflation expectations and real GDP growth estimates for FY20. While parallel fiscal tightening complemented by the bar on federal borrowing from the SBP allows the central bank to soft pedal on the monetary front, analysts look forward to upcoming inflation numbers for 1QFY20 and market participation in the upcoming T-bills/PIBs auction to exhibit conviction on the end to tightening cycle.

 

The clarity is likely to emerge from economic measures and concurrent results with an interest cycle crest being the first. SBP’s discourse on completion of adjustment program should provide the investment community with much needed confidence where Pakistan’s undemanding valuation appears a bargain. The benchmark index should ideally cheer the latest MPS where preferred sectors include Banks, Oil, Textiles and Power.

As domestic OMCs have their “backs against the wall” on the operational front (sagging POL volumes and tepid macro backdrop), analysts assess the relatively high margin lubricants segments, underscoring the competitive forces prevalent. FY18 lubricants offtake showed SHEL holding top position, where recently launched premium segment motor oils seem to aid the OMC in cementing market share, while HASCOL made inroads into the segment growing volumes by 27%YoY as against 7%YoY for total industry sales. Transport linked offtake remains the foundation of total lubricant sales, inextricably linking them with retail fuel dynamics, where higher prices and the dampened outlook for commercial transporters could weaken the shift to high-spec, fully synthetic oils with higher margins. Updated industry sales data released by OCAC shows a slowing of overall lubricant sales (11MFY19 sales were down 11%YoY), matched by points explained at PSO’s briefings (9MFY19 sales down 12%YoY) making for a dampened outlook for growth. Amongst listed players, SHEL receives the highest contribution to its gross profit from lubricant sales hence standing as the most exposed due to slowdown while the uncertainty extends to HASCOL with its blending plant recently commissioned, as management intends to focus more on high margin segments to support profitability.

Furnace oil based generation has drastically declined (down 61%YoY in 11MFY19) as 8,600MW, 60% of pre-expansion capacity, was added to the system during FY17-19. HUBC base plant, Nishat IPPs and Narowal witnessed lower dispatches during 11MFY19, with HUBC base plant being the worst affected. Considering minimal utilization levels, and long brewing capacity trap — capacity payments are likely to increase by 57%YoY to Rs1,000 billion during FY20 – USD hedged returns to FO based IPP have recently come under scrutiny. To grapple with this capacity trap, the GoP has initiated an inquiry of certain FO based IPPs (NCPL) allegedly earning excess returns, while also neglecting demands for PPA extension (KAPCO to work on take and pay model post FY21) or coal conversion of existing FO based plant (HUBC). Amid this background, HUBC is still investors’ top pick, offering 30% CAGR of earnings over FY18-23, led by the upcoming coal based power capacities. While KAPCO resuming payouts on any further circular debt settlement will be a good opportunity to exit.

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