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Stock Review

Bulls rule short-lived; instability persists, investors may take longer term view

During the week ended 26th July 2019, the benchmark index of Pakistan Stock Exchange (PSX) remained under pressure and registered a decline of 356 points to close at 32,103 levels. The week started on a positive trajectory as first two sessions cumulatively added 257 points to index, on the back of trip of Prime Minister Imran Khan to the United States, but subsequently sentiments turned bearish on weak macro indicators. The key sectors adding to the erosion in the Index were Power & Distribution Companies followed by Food & Oil Marketing Companies. According to NCCPL data, foreigners remained net buyers with US$8.4 million, but Mutual Funds remained net seller with US$13.4 million. Average daily trading volume once again plunged to 75.3 million shares. Increased participation in PIB auction reduced attractiveness of the equities market.

Top performers of the week included: INDU, POL, UBL, HBL and FFC, while FFBL, HASCOL, MLCF, PIOC and ASTL were the worst performers. The market is expected to remain volatile in coming days due to commencement of results season, while inflation number would determine the future interest rate trajectory. Investors are advised to take longer term view in evaluating investment opportunities, giving lesser weight to short-term performance, as market may rebound on improving economic indicators.

The total liquid foreign reserves held by Pakistan for the week ended 19th July 2019 were reported at US$14,862.4 million. The break-up was: reserves held by the State Bank of Pakistan amounted US$7,611.9 million and reserves held by commercial banks were US$7,250.5 million. During the week under review reserves held by the central bank decreased by US$389 million due to external debt servicing and other official payments.

Government of Pakistan (GoP) conducted the first Pakistan Investment Bonds (PIBs) auction after entering into an IMF program, wherein tenor wise collection was 3-years (Rs120 billion), 5-years (Rs55 billion) and 10-year (Rs25 billion) and cut-off rates were 14.25%, 13.8%, and 13.55% respectively. The cut-off rates were up by 55bps for 3-year bonds and remained unchanged for 5-year bond. However, for 10-year bond rates were down by 15bps compared to the last auction held on 26th June, 2019. Out of total offer of Rs700 billion, the government accepted bids worth Rs201 billion (29% of the amount) in fixed rate PIBs. In 10-Year bond, the government raised Rs84 billion out of total offer for Rs128 billion at 75bps above the benchmark rate. Cumulatively the GoP raised Rs285 billion, which was the second largest auction in last 5 years. The higher participation and rates were in line with market expectations. Historically, similar size of auctions were also conducted by PML-N government (during 1H2014 where around Rs1.8-2.0 trillion were raised to meet IMF requirement of shifting borrowings from SBP to commercial banks or other investors. It is believed that the latest auction was also in response to IMF’s criteria of lengthening maturity profile of government loans and shift of borrowings from SBP to commercial banks and other investors. Yield curve remains inverted in this auction. Lower return on 10-year PIBs compared to 3-year PIBs and 1-year T-bill signals soothing of inflation going forward. While, higher rates in 3-year and 1-year note/bill reflects investors need for higher return against expectations of higher inflation and modest tightening in near terms. Analysts anticipate further hike in policy rate by 50bps by end December 2019.


Urea offtake during 1H2019 posted growth of 5%YoY to 2.87 million tons on the back of pre buying by dealers/farmers amid expected hike in urea prices as the government remains adamant at increasing gas prices. Timely rain fall across the country also pushed up volumetric sales of urea. Among local producers, EFERT witnessed significant decline of 10%YoY as in Jan 2018 the company carried inventory of 184,000 tons, which came down to 10,000 tons at start of 2019. Similarly, urea production during 1H2019 witnessed growth of 13%YoY due to resumption in production by FatimaFert and Agritech, contributing 393,000 tons cumulatively during 1H2019 as compared to nil in 1H2018. Industry’s urea closing inventory for 1H2019 was reported at 178,000 tons. Total DAP sales during 1H2019 declined by 16%YoY to 572,000 tons due to increase in DAP prices by more than 20%. The largest fall of 55%YoY was seen in FFC sales to 83,000 tons, which was followed by FFBL, 3%YoY decline to 202,000 tons.

As against this, EFERT witness an increase of 6%YoY in DAP volumes to 185,000 tons. Key risks to fertilizer sector remain: 1) an unfavorable settlement of GIDC, 2) poor crop season and 3) increase in gas prices above market expectations.

Habib Bank (HBL) held its conference call to discuss its financial performance for 1H2019. The bank had posted an EPS of Rs0.44; down by 78%YoY in 2Q2019, while cumulative EPS for 1H2019 was reported at Rs2.54 down by 54%YoY. The significant decline in profitability was primarily on account of market-based events like revaluation loss on foreign exchange position (Rs3.6 billion) and impairment on listed securities (Rs 1.3 billion). Going forward, the management plans to reduce the open position to curtail upcoming losses emanating from foreign exchange. Net Interest Income (NII) increased by 20% YoY or Rs7.8 billion to which domestic NII contributed Rs6.5 billion. International NII also registered an increase of 14% (US$ 3.8 million) owing to improvement witnessed in Bahrain, UK and UAE regions. Normalized non-funded income augmented by 13%YoY led by higher investment banking fee, trade & loans, and card related fee. The Bank’s admin related costs increased by 10% YoY, however, additional costs associated with New York branch (Rs 3.4 billion), devaluation impact on overseas expenses (Rs1.2 billion), and head office with other related cost (Rs 0.9 billion) further jacked up aggregate administrative expenses. The bank foresees the advances growth to be higher than industry to range from 9 to 12 percent, while deposits growth will continue to track the country’s M2 growth rate.

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