Gains witnessed; long-term positions in focus
Momentum gained in the earlier week continued into the week ended on April 01, 2022. The benchmark index gained 3.7% WoW, the strongest weekly return since April 2022 to close at 45,152 points. Participation also improved during the week, with average daily trading volume rising to a little above 310 million shares – the highest in 11 weeks, with side scrips garnering investor attention.
Major news flows during the week were: 1) No-trust resolution against PM Imran Khan tabled in the National Assembly, 2) Punjab Chief Minister tendered his resignation to make space for a new Chief Minister possibly from PML-Q, PTI’s ally in the Centre and Punjab, 3) China rolled over US$2 billion SAFE deposits, however, payment of China’s loan syndicated facility resulted in an outflow of US$2.9 billion – resultantly FX reserves declined to US$12.0 billion, 4) IMF still in talks with Pakistan counterparts over 7th review, 5) Moody’s sees no-trust move against PM as credit negative, 6) NSS rates jumped up to 100bps across different instruments, 7) FBR registered 29% growth during July-March 2022 revenue collection despite massive tax relief, 8) PSO’s circular debt rose to an alarming level to PKR658 billion, 9) GoP pushed cash-strapped refiners to bump up output, and 10) Foreign investors pulled out US$397 million from capital markets in March 2022.
Foreigners sold US$15.5 million with the most being in Banks (US$13.7 million), along with Mutual Funds (US$5.2 million) which was absorbed by Banks (US$15.7 million) and Individuals (US$7.5 million).
Top performing stocks for the week included: ANL, IGIHL, DGKC, NRL and PIOC, while laggards were: COLG, SRVI, ATLH, ABL and EFERT.
Market is likely to be driven by political developments in the near term. However, ease-off in global commodities would provide episodes of gains. Ramadan season might keep market activity dry, but commencement of result season could bring investor interest in specific stocks. Analysts continue to advise investors for building long-term positions, limiting short-term trading.
Pakistan Stock Exchange benchmark index remained almost flat during March 2022, returning 1.1%MoM during the period under review as the compelling valuations and a slight ease off in the international commodity prices was picked up by market. Cumulatively, the market has returned 0.8% during 3MCY22. However, political noise remained heightened throughout the month as the united opposition ramped up pressure on incumbent Prime Minister as calls for no confidence against him gained momentum. Owing to the prevailing political uncertainty, the investor participation declined where the average daily traded volume in the All Share Index declined to 297 million shares from 328 million shares witnessed during February 2022. Top performing sectors during the month included: Leather, REITs, FMCGs and Insurance, while the major laggards were: OMCs, Refineries and Paper and Board. The settlement of matters on political noise will bring some stability to the market while the easing off of tensions between Russia and Ukraine will also help bring stability in the commodity markets which will also be positively received by the investors.
Increased geo-political tension has forced Europe and United States to increase their reliance on LNG, causing LNG spot prices to soar, increasing by 30% in last two weeks. It is anticipated that increased global demand will keep prices elevated in medium term. A direct impact of increased LNG prices is an increase in import bill with LNG constituting 24% of Pakistan’s energy imports bill. The recent defaults by suppliers will force Pakistan to choose between higher LNG prices or gas shortage locally. For players based in Punjab, cost of gas is expected to increase. The second round of impact will involve higher electricity prices with LNG forming 17% of the power mix for 8MFY22. AKD Research had highlighted PIOC, DGKC, DOL, SPL and Punjab based glass manufacturers could be some of the major casualties of higher gas and electricity tariffs. PSO will be single biggest casualty of increasing LNG prices from the listed universe of AKD Securities where company’s receivables from SNGP have already soared to PKR176 billion as of December 2021 against PKR98.6 billion as of June 2021 and with LNG prices continuing to remain elevated and political uncertainty causing a delay in implantation of WACOG bill, short term borrowings of PSO are only going to increase.
Fertilizer offtake numbers released by NFDC for February 2022 indicates that Urea offtake for the industry were 0.53 million tons, jumping by a whopping 30%YoY. Higher offtake during the month can be attributed to building inventory in anticipation of hike in urea prices amid implementation of WACOG mechanism. However, on monthly basis, the offtake came off by 12%. EFERT’s urea sales depicted a decline of 19%MoM whereas Fatima’s urea sales came off by 25%MoM and FFC’s by 6%MoM. While on YoY basis, a robust jump was seen in volumetric sales across all the industry players. DAP offtake contracted 37%MoM to 55,000 tons, taking cumulative DAP offtake during 2MCY22 to 168,000 tons as compared to 170,000 tons during the same period last year. Country’s ending inventory was reported at 69,000 tons, suggesting the possibility of the country importing urea from the international market. At present international prices of Urea hover around US$550/ton, easing off by 35% since the mid February 2022 where supply side disruptions amid Russia—Ukraine war had taken international prices to multiple year high.
Banking sector spread for February 2022 was reported at 4.61% – the highest in 16 months as interest rate hikes in the last quarter of 2021 begin to take effect on loans portfolio. More interestingly, the spread on fresh portfolio was reported at 5.25% – the highest since March 2020. Loan book buildup is undergoing visible change where RWA—Credit Risk of AKD private banking universe as a percentage of total assets was reported at 30.2% in CY21, slightly higher than 29.8% in CY20. BAFL continues to hold largest exposure to riskier segments relative to its asset size. HBL recorded the largest accretion in exposure to these segments (30.8% of total assets in CY21 vs. 27.1% in the same period last year). The banking industry has performed in line with KSE-100 — indicative of risk-averse behavior of investors taking precedence over fundamentals of the sector i.e. stronger dividend payouts and exposure to interest rate cycle. AKD Securities believe value will be unlocked in the sector where slower sales prospects for manufacturing sector and macroeconomic uncertainty elicits a general shift in investor preference from growth stocks to value.