Volatility witnessed; imf tranche, fatf talks may shape market direction
Pakistan Stock Exchange (PSX) witnessed volatility during the week ended 27th December 2019 and closed flattish at 40,849 points. The market opened on a weak note due to increased political uncertainty and start of the rollover week. The benchmark 100-Index recovered over the next two sessions on receipt of US$454 million from International Monetary Fund (IMF) and a positive outlook given in the first review by the Fund. The announcement about discovery of fossil reserves by PPL changed the market sentiment. After revising downward the FBR’s target to Rs5.2 trillion, from Rs5.5 trillion, Pakistan agreed to take ‘additional measures’ on the eve of presenting the budget review before parliament by end February 2020 under the new structural benchmark condition with the IMF.
Potential increase in taxation resulted in fear of inflationary pressures to continue in 1HCY19, delay the interest rate cuts to 2HCY20, turned the bourse’s closing for the fourth trading session in red. Volumes remained thin throughout the week, with average daily turnover of 230 million shares during the week, down 22.7% WoW.
Other major news affecting market sentiments included: 1) US resuming military training for Pakistan to improve ties, 2) FATF response to Pakistan progress report received, 3) Cost audit of fertilizer industry planned, 4) out-dated refineries seeking protection to keep running and 5) CCI approval of incentives for oil, gas exploration. Top performers of the week included: PIOC, ASTL, ENGRO, HUBC, and PSO, while laggards were included FFBL, APL and PSMC. Based on NCCPL data, foreigners emerged net seller with US$2.90 million. On the local front, Mutual Funds were buyer with US$7.2 million and Insurance companies were also buyer of US$10.5 million.
The IMF tranche received in the outgoing week will reflect in data released next week. Meanwhile, continued discussion with FATF is expected to shape the market direction. To add, political noise at the local front may also continue. That said market expectation would remain weak due to Christmas and New Year holidays.
Total liquid foreign exchange reserves held by Pakistan were reported at US$17,595.2 million on 20th December 2019. The break-up of the foreign reserves position was: reserves held by the State Bank of Pakistan were US$ 10,907.3 million and net foreign reserves held by commercial banks were US$ 6,687.9 million. During the week under review, reserves held by SBP increased by US$14 million to US$10,907.3 million. On 23rd December 2019, SBP received US$452.4 million from International Monetary Fund (IMF) as second tranche under EFF program. These funds will reflect as part of SBP weekly reserves as of 27th December-2019.
[ads1]
AKD Securities has updated its investment case for Maple Leaf Cement (MLCF) and recommended Sell stance as near term weak sector dynamics are expected to weigh significantly on profitability. Though, retail prices in North have considerably improved compared to 1QFY20, high discounting is expected to mitigate the impact. Recent right issue of Rs6.1 billion by MLCF is expected to decrease the debt burden significantly. However, commencement of debt repayment after start of production from new line and ongoing price competition is expected to keep dividend distribution low. MLCF has returned an astounding 58% in last two months as euphoria surrounding interest rate cut drove the stock prices. Moving forward, we expect prices to come under pressure in near term as reality of weak sector dynamics sets in. However in medium term, normalizing sector dynamics and further expectations of interest rate cut can induce a rally.
Bank Alfalah (BAFL) has underperformed the broader banking sector on concerns that the Bank is excessively exposed to the SME sector carrying the highest systematic risks and market factors (foreign interest, cheap valuations, recovery story) putting top tier banking stocks into limelight. The earnings accretion is forecast at the back of: 1) Net Interest Income (NII) likely growing at a 9.6% AGR, 2) NFI expected to record a CAGR of 10.3% where realization of gains and digitization fees and commission could surprise on the upside and 3) contained credit costs. Changing gear from consolidation to growth with significant improvement in ROE and strengthening regulatory buffers. BAFL has added 24 branches till September 2019, with plans to add another 50 branches by end December 2019.
Following a steep jump in November 2019, national headline inflation is likely to decelerate to 12.41%YoY in December 2019 as compared to 12.67%YoY in the preceding month and 5.40%YoY in December 2018. Price normalization after mini supply shock and a seasonal decline in certain food items along with downward revision in POL prices are major factors driving inflation lower. Sequentially, the CPI index is likely to decline 0.54%MoM largely due to price normalization as against an average monthly increase of 1.49%MoM in 5MFY20, signifying an early sign of price stability. That said, inflation readings until February 2020 are likely to remain elevated, supported both by soft base and utility price adjustments. OGRA has approved a 29% weighted average hike in gas prices for domestic consumers. This will have a direct inflationary impact. While the latest price trends suggest inflationary pressures are losing momentum, the rate cut by the central bank would require a significant decline in inflation as stressed by the IMF in its latest review.
Analysts expect the inflation to moderate from March 2020 onwards, as the economy moves past the 1QCY20 adjustment cycle, thus anticipate the first rate cut in 2QCY20.