Massive selloff witnessed, uncertainty on Covid-19 fear to persist
The week ended on 20th March 2020 started on a massive selloff and increased concerns over growing cases of coronavirus around the world. Commodities also witnessed a slide on the back of decreasing demand projections whereas ongoing tussle between global oil players also took a toll on oil prices. That said, slight rebound was witnessed towards tail-end of the week as investors went after cheap valuations.
Consequently, the benchmark index of Pakistan Stock Exchange (PSX) closed the week at 30,667 points, down 14.5%WoW. Foreign investors continued with the selling, in-line with the global sell-off, as net FIPI outflow rose to US$19.6 million for the week taking. Month-to date outflows were reported at US$59.3 million. Average daily trading volume declined by 9.5%WoW to 239.2 million shares during the week. The scrips generating large volumes during the week included: BOP, KEL, MLCF and UNITY, while laggards were: PIOC, NML, NCL, CHCC and PAEL.
As PSX continue to witness erosion in value, the Securities and Exchange Commission of Pakistan (SECP) on Thursday notified amendments in the base minimum capital (BMC) requirements, believing that it would support the market players. The move has been made to extend liquidity to brokers. Besides, such measures will give a positive message to the investors too that the regulator was concerned about the situation. The PSX Stockbrokers Association has expressed skepticism regarding the move saying the relaxation of 60 days to deposit exposures against the client’s assets under broker’s custody will only benefit the large players.
Major news flow driving market sentiment included: 1) State Bank of Pakistan (SBP) reducing its policy rate by 75bps to 12.5%, while announcing two new measures to provide subsidized credit to industry to help meet challenges posed by the growing pandemic, 2) Moody’s Investor Service decreasing its forecast for Pakistan growth rate to 2.5% for the current fiscal year, 3) Petroleum Division initiating a process of consultation to consider reduction in allowable UFG benchmarks along with reduction in return on assets and rationalization of transmission and distribution costs, 4) Pakistan’s current account deficit (CAD) shrinking by 71.0% to US$2.84 billion during 8MFY20 compared to US$9.82 billion for the corresponding period last year, and 5) Government considering an “economic emergency bailout package” within a week to address the likely short-to-medium term liquidity crunch to various sectors of the economy.
Going forward, market is going to be dominated by how the situation regarding COVID-19 evolves. Any increase in uncertainty over international commodity prices, particularly oil, can keep the market jittery. The only respite can appear from the economic package government is mulling, any disappoint on that front can put market under severe pressure.
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The total liquid foreign exchange reserves of Pakistan were reported at US$18,743.0 million on 13th March 2020. The break-up was: reserves held by the State Bank of Pakistan (SBP) amounted US$12,679.6 million and the net reserves held by commercial banks were reported at US$6,063.4 million. During the week under review, reserves held by the central bank decreased by US$110 million to US$12,679.6 million. The decline in reserves can be attributed to repayments related to external Government debt, Hajj and other official payments during the week.
Following the broader market sentiment driven by coronavirus outbreak, Engro Fertilizers (EFERT) has shed 22.5% value CYTD. This steep price decline has resulted in the scrip offering one of the highest dividend yields. According to a report by AKD Securities there has been: 1) Rs160/bag decline in urea price as compared to Rs375/bag decline for FFC and 2) GIDC elimination on feed/fuel gas. The Company has reduced urea prices in line with the savings from GIDC elimination. However, the brokerage has highlight that the if GoP forces EFERT to bring down its urea price at par with FFC, its earnings for CY20-22 would decline by 32% or Rs3.84/share at an average. Therefore, the investors are advised to remain cautious instead of being allured, until clarity on pricing emerges.
To add to the potential downside risks, oil prices have plunged by 61% CYTD to US$26/barrel. Sustainability of Brent at or below US$30 and assuming USD/PKR parity at 158, may translate into cheaper LNG available. This could prompt closed fertilizer plants (FatimaFert and Agritech with a combined capacity of 900,000 tons or 15% of total capacity) resuming operations. The GoP will have to offer a minimal subsidy up to Rs10 billion to ensure profitable operations of the closed fertilizer plants. This is an option GoP may be willing to consider if the price differential between FFC and EFERT continues and the latter does not concede to further reducing urea prices. Recall, FatimaFert and Agritech produced 770,000 tons urea during CY19, which resulted in urea inventory exceeding one million tons in November 2019. A recurrence of such scenario may pressure sector’s pricing power, while EFERT will be first one to feel the heat, with urea prices at the highest relative to peers.
Meanwhile, news reports suggest that EFERT has put forth a proposal to GoP which entails the former agreeing to reduce urea price, in exchange of alignment of pricing of entire gas supply for its base plant to industry levels. The proposal only makes economic sense if the aforementioned gas supply is priced at feed rates of Rs300/mmbtu as compared to fuel rates of Rs1,022/mmbtu. This will limit the negative EPS impact of urea price reduction.