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Stock Review

The market started the week on a positive note, following encouraging developments on macro front – soft inflation numbers of 12.4% for February 2020, supported by promising trade numbers and trade deficit falling by 19.7%YoY and 15.8%MoM. The benchmark index of Pakistan Stock Exchange (PSX) gained 1,312 points in the first trading session. However, the market was quick in losing 389 points in the next two trading sessions. The mid-week Fed’s emergency rate cut and consequent reduction in bond yields once again raised the easing expectation amongst market participants, which led to another brief rally of 475 points in the fourth trading session. The market once again couldn’t sustain the momentum and lost massive 1,162 points in the last trading session of the week, overall, the index closed the week 0.62% higher at 38,220 points. Cyclicals were the major outperformers, with Cement sector leading the pack. The sector rallied 12.5%WoW on solid volumetric offtake and early easing expectations, while Steel, Chemicals, and Cable & Electrical Goods were other notable outperformers.

On the flip side, Commercial banks lost 3.8% of their market capitalization, as the investors started pricing the early interest rate cut. Key news flows impacting the market during the week were: 1) the United States signed historic deal with the Taliban, laying out a timetable for a full troop withdrawal from Afghanistan within 14 months, seeking an exit from its longest-ever war, 2) latest reported numbers showed 16.35%YoY growth in FBR’s tax revenue collection for 8MFY20 to Rs2.72 trillion while revenue shortfall widened to Rs484 billion, 3) The government reduced POL product prices by PKR5 per liter for the month of March 2020, partially passing on the impact of declining oil prices, 4) foreign portfolio investors made the first notable withdrawal from rupee based government debt securities, with cumulative outflows reaching US$488 million and 5) Fauji Fertilizer Company (FFC) – which accounts for 40% of total country’s urea offtake – reduced its urea price by another Rs75 per bag to Rs1,665 per bag.

Total liquid foreign reserves held by Pakistan were reported at US$18,869 million on 28th February 2020.The break-up of the foreign reserves position was, foreign reserves held by the State Bank of Pakistan (SBP) were reported at US$12,757.5 million, whereas Net foreign reserves held by commercial banks were reported at US$6,111.5 million. During the week ended on 28th February 2020, reserves held by SBP increased by US$166 million to US$12,757.5 million.

Monetary policy announcement will be the most-watched event next week, impacting the market performance. The expectations are tilted towards rate cut following soft inflation numbers and the US Fed opting for an emergency rate cut. Analysts expect the SBP would opt for ‘status quo’, as the expected deceleration in inflation is primarily due to high base effect, delay in utility rate adjustments and price normalization in certain food categories rather than genuine price declines across the basket. Besides, the market will continue to track global developments pertaining to coronavirus, particularly the policy response from central banks of other countries and the OPEC.

Following 1HFY20 results announcement Pakistan State Oil Company (PSO), the OMC held analyst briefing. AKD Securities amended its forecast for the state owned OMC on the back of: 1) inventory losses of Rs2.6 billion for 2QFY20, and 2) higher finance cost as the Company continued to retire foreign loans (having lower markup) in favor of more expensive short term borrowing.

PSO’s market share in retail fuels has increased to 42% in 7MFY20 against 37% in 7MFY19, aided by HASCOL vacating the space while company also provided discounts which.

According to news reports, issue of Sukuk-II is expected to partially settle the circular debt woes related to power sector. However, increasing receivables from LNG sector are developing into a major concern particularly if the government continues to delay the revision in gas prices.

Analysts believe the Sukuk issue will provide support in the near term, while margin revision towards end of FY20 can prove to be an additional trigger. However, a possible delay in revision, as government looks to control inflation, poses a downside risk to the estimates

According to a report by Mettis Global, Faysal Bank of Pakistan has been aggressively working to convert its conventional banking system into Shariah compliant system. The efforts have yielded positive results; it achieved 75 percent of its target by the end of 2019.

A year ago, it had succeeded in converting half of its operation to Islamic banking, from conventional banking. The present management continued migration from one of banking systems to another in the outgoing year and succeeded in converting another 25 percent branches to Islamic banking.

The Bank has added 100 new branches of Islamic banking in different cities in 2019 along with the conversion of 59 branches from the interest-based banking system to Shariah based. The overall count of Islamic branches operated by the Bank reached 414 out of total 555 branches by the end of 2019.

Faysal Bank plans to achieve its target to become a full-fledged Islamic bank, when this target is achieved, it will become the sixth full-fledged Islamic bank of Pakistan.

Faysal Bank will become the first bank of its kind in Pakistan to converted from one system to another and set an example for other banks to follow its . The migration of the Bank from the interest based bank to Shariah based entity proves the fact that the general public prefers Islamic banking in Pakistan over conventional banks.

With an increase in the awareness of Islamic banking among the general public, the Islamic banking system will grow in Pakistan at an accelerated pace, which will also enhance the banked population of the country in years to come.

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