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Index ends Nov-2019 on highest note since 77months; stocks may move under pressure

Pakistan Stock Exchange (PSX) closed positively for third consecutive month and gained 15% during November 2019, which was highest index gain in last 77 months. Investors’ sentiments remained positive on the back of successful IMF review and encouraging macroeconomic indicators that included: 1) higher interest in local debt securities of Pakistan, depicted by inflow of US$713 million (T-Bills and PIBs) in SCRA account during the outgoing month, 2) Pakistan reported current account surplus of US$99 million for first time in last 4 years and 3) expectations of monetary easing going forward. Based on NCCPL data, foreigners emerged net buyer with US$8.84 million, while on the local front Banks and Insurance Companies remained net seller with US$53.4 million and US$20.8 million respectively. Price performance was evident with top performers including: FCEPL, GWLC, FFBL, PSMC, HASCOL, MLCF, and EFERT. Volume leaders included: UNITY, BOP, PAEL and FFL.

Other news flow driving investors’ sentiment included: 1) the monetary policy committee of the SBP kept discount rates unchanged at 13.25% due to high inflationary pressures, 2) the Supreme Court on Thursday granted six-month extension in the service of Army Chief General Qamar Javed Bajwa, 3) on a surprise trip to Afghanistan on Thursday, President Trump said the United States had reopened peace talks with the Taliban, 4) foreign exchange reserves held by the SBP rose by US$240 million to US$8.6 billion due to official inflows, while reserves held by commercial banks fell to US$6.8 billion and 5) NEPRA on Tuesday allowed ex-Wapda Discos to transfer the burden of Rs14.7 billion (14.56 paisa per unit) to the power consumers on account of power purchase price adjustment for 1QFY20.

While medium term triggers are centered around policy initiatives to be taken by the GoP (circular debt clearance, GIDC proceeding outcomes), key events to look for in the month of December include: 1) approval of release of funds and release of IMF’s first staff level review report under the current EFF program and 2) result of second OPEC’s semi-annual meeting for 2019 where any consensus on supply could sway crude prices. Factoring these, overall index performance can remain under pressure. However, news flows regarding possible mini-budget (in accordance with strict fiscal targets of the IMF program) could drive performance in select domestic industries (chemicals, construction, steel).

With the end of November 2019, reviewing the performance of Pakistan Stock Exchange may be of some interest for the investors. Last three month performance was underpinned by healthy uptick in volumes and continued activity in main board plays. Since the September’s sustained recovery, sectoral performance has been led by returns for Pharmaceuticals/Engineering/Cable and Electrical/OMCs while E&Ps/Banks returns, signifying the broad based improvement in risk profile and raising expectations of monetary easing. In this backdrop analysts assess near to medium term profitability and earnings growth outlooks for key sectors Banks, Cements, Fertilizers, E&Ps and Steel, ascertaining whether market’s recent re-rating can continue its momentum. On construction driven materials plays (Cements and Steels), demand growth (either by public sector development or organic avenues) is yet to materially enhance profitability, while numerous regulatory hurdles cloud the outlook for Fertilizer space and E&Ps continue to remain attractive on valuations.

 

Expectation surrounding monetary easing has resulted in the Banking sector underperforming the benchmark index. While volatility in the sector cannot be ruled out as investors take exposures as per expectation, mean reversion of valuation multiples vis-à-vis historical levels along with robust earnings expectation could result in price performance over the medium run.

Automobile industry (including parts) witnessed movement attributable to a number of factors that include: 1) automobile penetration levels, where Pakistan lags behind regional markets indicating continued room for motorization, 2) credit offtake to the transport category, with SBP data indicating a cooling-off period similar to the late down-cycle of FY11-12 and 3) expectations of consumer confidence and outlook for improved economic growth, fueling consumer durable spending. On all these metrics, room for sustained growth is evident, with credit offtake remaining relatively durable unlike the large credit drawdown seen in FY09-10, boding well for sustaining sales demand in an up cycle. On questions of expected durable spending, CCI responses for September 2019 are at levels last seen in mid FY12-13 (the period just before a demand up cycle), showcasing the relative fickleness/fragility of consumer expectations, and how any improvement in economic outlook shifts consumer sentiment.

Overlaying the demand cycles with stock performance in the auto assembly and auto parts sectors, analysts highlight the relatively disparate performance seen in select stocks as opposed to the wider sector indices with investors favoring large suppliers (GTYR,BCL, EXIDE) as ‘safe haven’, consumer plays over individual OEMS. This can be seen in both the FY09-10 and FY13- 14 cycles, with FY20TD performance indicating a similar pattern being followed. Since most of these suppliers have deep competitive ‘moats’ (track records of meeting existing agreements particularly for supplying OEMs, strong dealer networks, significant CAPEX and enhancements of existing plants) and are beneficiaries of the GoP’s documentation initiative, including anti-smuggling efforts. While additional idiosyncratic and industry-wide phenomenon often drive stock performance, new model launches remain a steady catalyst for pulling demand higher and driving stock performance across the OEMs and suppliers. These factors support a buy and hold strategy, where amongst our coverage cluster INDU remains a consistent performer, benefitting from demand pickup and an expected new model launch.

During November 2019, total cement sales are expected to post a growth of 8%YoY to 4.3 million tons. During 5MFY20, total industry sales are expected to post growth of 5%YoY growth to 20.3 million tons. However, industry sales are likely to drop by 15%MoM during the month due to seasonal factors. Domestic cement sales are likely to grow by 2%YoY to 3.4 million tons led by sales in the northern region. Growth was driven by dispatches to southern region and stocking by dealers. On the other hand, sales in the southern region are anticipated to continue its downward trajectory and post a decline of 25%YoY to 0.5 million tons primarily due to lower construction activity and competition posed by manufacturers from north. On exports front, the industry sales are likely to post impressive growth of 45%YoY led by exports from the southern region led by clinker sales to Bangladesh amounting to 155,000 tons by DGKC. Exports sales in 5MFY20 are expected to record 22% YoY growth to 3.6 million tons.

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