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Losing streak continues as investors’ sentiments dampen; result announcements eyed

Pakistan Stock Exchange (PSX) extended its 4th week of losing streak. Investors’ sentiments were dampened by high inflation rate and poor corporate results, as they overlooked numerous positives. The positives included government backed Sadiq Sanjrani’s surprise win in the Senate vote and resumption of military sales from the United States. The benchmark index lost 437 points or 1.36%WoW to close the week ended 2nd August at 31,666 points. Based on NCCPL data, foreigners remained net buyers amounting to US$3.4 million, as against this Mutual Funds emerged net seller of US$4.8 million.

Key news flows impacting the market during the week included: 1) Senate Chairman, Sadiq Sanjrani surviving no-confidence move on Thursday, despite opposition enjoying majority in the upper house, 2) headline inflation for July 2019 hitting a 6-year high of 10.34%YoY as against 8.89%YoY for June 2019 and 5.83%YoY for July last year, 3) US administration resuming US$125 million military sales for Pakistan, practically ending a freeze on military assistance to the country, 4) the GoP planning to issue another PkR200 billion Energy Sukuk in third week of August in a bid to reduce outstanding energy sector’s circular debt, 5) the GoP raising US$500 million through an Islamic syndicated loan provided by a consortium of 12 banks and 6) the GoP working on the new ‘Pakistan Oil Refining and Marketing Policy 2019’, under which it is likely to scrap deemed duty on HSD sale and introduce refinery margins for oil refineries. Top performers of week included APL, FATIMA and POL, while ASTL, HASCOL and EFOODS remained the worst performers.

Positives both on the macro (formal entry into the IMF program, stability in Rupee, tightening cycle nearing its end, fiscal reforms starting to yield results) and on the political front (Imran Khan’s successful visit to the US and surprise win of the government-backed Chairman Senate’s survival) are hard to ignore. Other strong catalysts include: 1) avoidance of blacklisting in next FATF review, 2) upside earnings surprises though less likely and 3) positive surprises on inflation, CAD and budget deficit numbers have the potential to trigger a rally. However, near term market performance might closely follow result announcements. Major announcements scheduled for next week include UBL, MCB, EFERT, EPCL and AGP.

The high CPI rate negates the effectiveness of pre-emptive rate hikes by the State Bank of Pakistan (SBP) as the latest monthly data shows headline inflation hitting a six-year high of 10.32%YoY in July 2019 as against 8.89%YoY in June 2019 and 5.83%YoY in July last year. Sequentially, the CPI index jumped 2.28%MoM. The key contributory factors were one-off utility rate adjustments (27% contribution to overall increase), recently announced budgetary measures (contributing 23%), quarterly housing rent adjustment (18%) and rising fuel prices (9%), pushing monthly inflation reading to a multi-year high. While the headline inflation has significantly risen and will continue to remain high over the next few months, pro-active monetary tightening and tight parallel fiscal policy provide meaningful room to SBO to hold interest rates steady. That said, public debt management in the backdrop of a bar on federal government borrowing from the central bank could complicate the monetary policy setting. The upcoming inflation readings remain critical in determining the monetary policy outlook.

 

In July 2019, Pakistan Stock Exchange remained in red for the sixth consecutive month, taking cumulative 7MCY19 decline of benchmark index to 13.8YoY, with investors’ participation declining 38YoY and 43%MoM. Despite the IMF Board’s approval of the US$6 billion Extended Fund Facility (EFF) package, and disbursement of the first tranche, investors switched their focus to accompanying terms, particularly harsh fiscal adjustments required under the program, while mounting inflationary pressures (somewhat preempted by hastened policy rate hike by another 100bps) set the road to monetary consolidation. The ‘flight to safety’ trade gained ground, with greater portion of traded share activity made up of KSE-100 stocks (80.5%) than the average CYTD (71.1%) as investor sought refuge in cheap valuations, while catalysts on the horizon (Rs200 billion Energy Sukuk, new tax claims mechanism for industry) remained few and far in between to spur sizeable buying interest. Accelerated FPI inflows (US$30.4 million) balanced rampant selling by Mutual Funds (US$44.3 million) where repositioning by unit holders to take advantage of rising short term yields, and apathy from other investor classes subdued flows. Foreign buying interest was seen in Cements (US$13.1 million inflow), Commercial Banks (US$12.4 million) and Power Generation (US$6.9 million).

After undergoing steep declines, attractive valuations are hard to ignore, with main board stocks looking cheap at present levels, with Banks and E&Ps remaining drivers of counter-cyclical growth. Materiality of macro measures and their desired impacts (particularly monetary policy) is unlikely to materialize before 4QCY19, making the current quarter a particularly volatile one. Reiterating a long term horizon, MEBL, HBL, OGDC, NML, HUBC, EFERT are blue-chips to focus.

Pakistani banks offer short term pain, but long term gain. Habib Bank (HBL) has gained 4.51% over the past one month, outperforming KSE-100 Index by 11.2% as investors weighed improvements in core fundamentals over short-term strains. Even a weak 2Q result kept investors undeterred where exogenous factors (losses on forex and equities) overshadowed strong performance on core metrics. HBL reported 2QCY19 EPS of Rs0.44 where sequential performance was dragged by realized loss on equities (Rs1.75 billion), forex loss on un-hedged borrowing (Rs3.6 billion) and higher non-markup expenses (up 9.0%). Incorporating externalities and expectation of higher recurring operating costs, at least in the medium term, analysts have revised down their medium term EPS forecasts, while still expecting ROE to gradually converge to its long-term average of 18.6%, with an extended runway.

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