Index falls; IMF program may likely set tone
Putting an end to 6-week streak of positive returns, on Friday January 21, 2022 the KSE-100 index closed at 45,018 points, down 1.63%WoW. The fall was attributed to a sharp increase in oil prices due to geopolitical risks in the Middle East and widening Credit Default Spread (CDS) on Government of Pakistan (GoP) bonds denting investors’ sentiments amid lack of triggers
Average daily trading volumes dried up, falling to 201.2 million shares, falling from 355.6 million shares a week ago. During the week, activity shifted slightly to small-cap stocks from mainboard scrips. Stock wise, top gainers were: KAPCO, FCEPL, DCR, GSKCH and GADT, while top laggards included: TRG, ANL, CNERGY, JDWS and ATRL.
Major news flows during the week included: 1) GoP revising up FY21 GDP growth to 5.37% against provisional estimate of 3.94%, 2) rising COVID cases with positivity rate at the end of the week reaching 12.9% and positive cases at 7,678 pushing authorities to take measures to contain the spread, 3) remittances were reported at US$2.5 billion for December 2021, continuing to cushion Pakistan’s external account, 4) authorities kicking off process to issue Sukuk worth US$1.0 billion and 5) Refineries issuing warning of inventory buildup of Furnace Oil price due to lower offtake by power plants. Sector-wise, within mainboard, E&P sector stood as the top performer with a gain of 0.4%WoW, while the Techs (down 4.6%WoW) were major underperformer. Overall, REIT turned out to be top gainer with a return of 3.6%WoW and Refineries as the top laggard with a negative return of 10.0%WoW.
Amid the backdrop of the IMF program, foreigners and companies offloaded stocks, resulting in net sales of US$2.0 million and US$10.3 million, respectively, while mutual funds sold off US$7.8 million. Conversely, individuals and banks emerged as key buyers, injecting US$12.3 million and US$5.9 million into the market.
Monetary policy for next two months is set to be announced in the coming week and analysts expect status quo in the policy rate at 9.75%. However, any negative surprise cannot be ruled out given sharp increase in oil price which can keep market volatile and hence a closer look is warranted. Overall, resumption of IMF program is likely to set the tone for the market in the near term. Accumulation is advised on any dips as the GoP seems determined to meet all the prior commitments. Analysts advocate building positions in Commercial Banks, Technology companies, Cements, Steel and Construction and Allied sectors.
Pakistan’s textiles exports surged by 25%YoY to US$9.4 billion during the first half of FY22 as compared to US$7.4 billion in the corresponding period a year ago. Growth was seen across the value chain and some of the categories showing highest growth over the period under review were raw cotton, cotton yarn, knitwear and readymade garments, each reporting a handsome growth.
For December 2021 alone, textile exports increased by 15.9%YoY, while the exports during the month were recorded at US$1.6 billion as compared to US$1.4 billion during December 2020. On month-on-month basis, the textile exports witnessed a decline of 6.5% whereas the exports in November 2021 were reported at US$1.7 billion. Local yarn margins have eased off slightly in the wake of last spurt in cotton prices. With yarn prices historically moving with a lag to cotton prices, analysts expect the same to be adjusted in coming days. They continue to flag NML as their top pick owing to its diversification across value chain, new expansions coming online and strong dividend income.
CY21 marks yet another year of strong regulatory actions on part of the central bank, but this time focused was on supplementing GoP’s intent to promote housing and construction sector, rolling back of incentives allowed during COVID-period and at times also introduced tangible actions to put growth on sustainable footing. “Return-to-normal” phenomenon was most visible in SBP policy making as it remained focused on being pro-active to risks to fragile economic fundamentals, re-adopted inflation targeting approach for monetary settings, increasing its policy rate by 275bps in to 9.75%. It also increased CRR for banks to 6% from 5%. Credit for housing and construction is likely to further take precedence on other consumer products stepping into CY22 due to tighter regulations on these products. Establishment of Digital Banks is another interesting proposition to further central bank’s objective of financial inclusion. From investment perspective, analysts have a strong preference for the sector in CY22 with interest rate tightening potentially continuing in 1HCY22 but at a gradual pace allowing for faster translation of interest rate curve into sector’s earnings profile. The top picks are, MEBL, MCB, and BAFL.
After posting a strong end to CY21 where margins for gasoline/diesel increased for last fifteen days of December 2021, increasing cases of Omicron globally imparted some pressure and refining margins for gasoline/diesel were reported at US$7.4/8.3/bbl for first fifteen days of January 2022. Overall, refinery margins have seen a significant recovery during CY21 where margins for petrol increased from US$1.3/bbl at the start of the year to US$12.3/bbl towards the end while margins for diesel closed CY22 at US$11.8/bbl against US$2.52/bbl at the start of year. HSFO margins continue to remain in negative where after posting a slight recovery towards the end of CY21, margins have again slipped after start of CY22 and stood at negative US$16.2/bbl for fist fifteen days of January 2022 against US$10.8/bbl for last fifteen days of December 2021. Moving forward, analysts expect margins to continue the volatile path and given no indication of a stringent lockdown globally, supply side is going to dictate prices where recent discipline indicate that oil prices will sustain the current levels in near term, hence margins are expected to reflect similar strength. For local refiners, current scenario paints an encouraging picture where increasing gasoline and diesel spreads will enhance the overall GRMs given the downside for HSFO cracks seems limited.
The KSE-100 index sees a 1.63% decline influenced by rising oil prices and geopolitical tensions. IMF’s upcoming decisions, Pakistan’s GDP growth, and monetary policy play a pivotal role in setting market tone. Textile exports surge, while regulatory actions from the central bank hint at economic directions. Stay updated on the market dynamics for informed investment decisions