Index posts 1.4%wow gain amid political uncertainty
The week ended on April 28, 2023 was marred with political uncertainty. The United States asked Pakistan to move ahead on stalled reforms by the IMF, while promising technical help in worst economic times. The IMF awaits clarity on the cross fuel subsidy scheme.
In addition to this, foreign exchange reserves inched by US$30 million to US$4.5 billion as on April 20, 2023, culminating to an import cover of less than a month.
The KSE-100 index closed the week at 41,581 points, posting 1.40%WoW gain. Participation in the market was a pleasant surprise, daily trading volumes averaging a little above 208 million shares during the week as compared to around 105 million shares in the prior week depicting 98%WoW gain.
Other major news flows during the week included: 1) Saudi Arabia expected to sign deal for US$2 billion deposits, 2) GoP cuts growth rate to 0.8 percent, 3) profit repatriation during first 9 months of the current financial year plunges by 82% to US$233 million, 4) CPPA-G seeks positive adjustment of PKR1.17/unit, 5) regulator asks DISCOS to freeze capacity payments and 6) GoP bank borrowings surge 182% to PKR3 trillion.
Top performing sectors were: Vanaspati & Allied Industries, Tobacco, and Investment Banks, while the least favorite sectors included: Close End Mutual Funds, Leasing Companies and Glass & Ceramics.
Top performing scrips were: POML, SRVI, DAWH, UBL, and MUREB, while laggards included: PGLC, HGFA, KAPCO, BOP, and PIBTL.
Flow wise, companies were the major buyers with net buy of US$15.9 million, followed by individuals with net buy of US$14.17 million, while Mutual Funds were major sellers during the week, with a net sell of US$1.63 million.
According to media reports, Saudi Arabia and UAE have intimated IMF on financing support giving a relief on external financing shortfall of US$6 billion will dictate the market performance in near term. Moreover, political situation will be in limelight till general elections are held. Keeping that in view, analysts continue to advice scrips that have dollar-denominated revenue streams which hedges the investor against the currency risk, that include the Technology and E&P sectors.
Headline inflation in the country is expected to clock in at 36.5%YoY for the month of April 2023, as compared to 35.4%YoY in the earlier month, taking the FY23TD average to 28.1%YoY. On a sequential basis, analysts’ expectations correspond to a 2.4%MoM increase in CPI. As has been the trend in the recent past, headline inflation is being driven by increases in food prices, culminating into a 45.2%YoY increase in the food index during April 2023. Product-wise, according to SPI data released by the PBS, the greatest positive contribution to the index is expected to come from: Potatoes, Wheat flour, and Bananas. The negative contribution during the month came from: Onions, Tomatoes, and Garlic. To recall, the prices of onions and tomatoes were elevated during the previous months. In addition to the increased food prices, inflationary pressures can also be somewhat traced back to the heightened GST on luxury and non-essential goods from 17% in February 2023.
As per the recent push from the IMF, energy tariffs in the country have been increased, which is driving the housing index, expected to post a 25.2%YoY increase in the month of April 2023. A substantial surcharge of PKR3.23/unit would be experienced in the month of April 2023. In the absence of the aforementioned charge, the headline inflation in the country would have clocked in at 35.0%YoY during the month. Furthermore, prices of petroleum products, including MS and HSD, have also seen an increase during the month, adding to the inflationary readings in the country.
The SBP raised interest rates by 100bps earlier this month, taking the policy rate to 21% in the country. The central bank announced that the latest hike in interest rates nudged real interest rates in Pakistan into positive territory, based on inflation expectations in the upcoming year. Hence, based on the policymakers’ comments, it is likely that the latest rate hike is the last one in this cycle, at least for the time being.
Inflationary pressures to a large extent is being driven by the weakness in the PKR against the greenback, as either the products themselves, or key raw materials, are imported. The situation has been worsened by elevated commodity prices in the recent past, and the floods that hit Pakistan in August 2022—leading to food shortages. As a result, inflation is expected to remain elevated on a YoY basis in the last two months of the current fiscal year, leading us to forecast an average FY23 inflation of 29.3%YoY. This is in line with the SBP’s target of 27% to 29% inflation in FY23. Starting next year, the high-base effect is expected to kick in, leading to inflation readings easing to comparably lower levels. Analysts estimate headline inflation to average 20.2% in FY24.