KSE-100 rebounded in Sep’19, rising 8% mom, after seven consecutive months of decline (CYTD return -13%). This was led by a status-quo monetary policy and an ensuing decline in money market rates (in longer tenure).
Market activity also picked up 11% mom to US$29mn average daily traded value. FIPI remained moderately negative (US$3.5mn outflow), while local mutual funds selling slowed down considerably.
We advocate remaining Overweight in defensive sectors. Our top picks are OGDC, HBL, ENGRO, HUBC and APL. Among cyclicals, we prefer LUCK, MUGHAL and ISL. Key checkpoints for the market are: (i) the FATF verdict on Pakistan (due Oct’19), and (ii) the first IMF program review due in Dec’19.
Market rebounded on subdued local selling
Status-quo in the MPS, a key impetus for the market was moderated selling by local mutual funds as their redemption pressure eased off during the month. Against an average net sell of PKR3.6bn per month (US$23mn/mth) in 8MCY19, mutual funds’ net sell in Sep’19 was c PKR0.6bn (US$4mn). This is partly because some local pension funds have also deployed fresh funds into the market by making placements with mutual funds.
Major events during Sep’19
SBP maintains policy rate at 13.25%: This was the first pause in monetary tightening after eight consecutive hikes. SBP’s stance was based on an unchanged inflation outlook (11-12% range) and comfort from markets smoothly adjusting to the new exchange rate regime. Another reinforcement was CAD declining 53% yoy during July-August to US$1.3bn. We think interest rates have peaked, but the central bank will wait until 2020 to commence cutting rates.
Saudi oil facility attacked: A key event for global oil markets was a drone attack on the largest oil facilities in Saudi Arabia, which threatened to disrupt about 5% of global oil supply. However, the Saudi government was able to restore about 75% of the lost supply within weeks – which helped stabilize international oil prices. From Pakistan’s standpoint, higher oil prices would have jeopardized still-nascent macro improvement.
GoP retreats on GIDC resolution: Amid widespread opposition, GoP withdrew the planned GIDC resolution – which entailed halving of future charge in return for payment of 50% of outstanding dues from gas consumers. The withdrawal not only has led to higher urea prices (which GoP was trying to prevent), but also shows the weak ability of the incumbent government to pass difficult reforms, in our view. The case will now be heard by the Supreme Court in Oct’19.
Broad-based economic slowdown: LSM sector declined 3.3% yoy in July’19 (down 3.6% yoy in FY19). Two auto OEMs – Indus Motors and Honda Atlas – temporarily shut down plants during Sep’19 following a sharp 35% yoy decline in auto sales during July-Aug’19. Cement sales also fell 3% yoy during the same period. Amid the slowdown, however, circular debt buildup reportedly slowed to PKR18bn per month from a PKR38bn run rate during FY18. IMF also praised Pakistan’s progress on macro reforms so far in its consultative meetings
Pakistan is presently trading at multi-year low P/E of 5.6x, despite FY20f ROE of 16% and DY of 9% in our coverage. We advocate remaining defensive in Banks, E&Ps and Fertilizers as near-term quarterly results will likely depict worse slowdown in earnings. Better entry levels – particularly in cyclicals – may be available close to end of 2019, in our view. Our top picks are OGDC, HBL, ENGRO, HUBC and APL. Among cyclicals, we prefer LUCK, MUGHAL and ISL.
Risks: (i) More strict measures demanded by IMF, (ii) Pakistan remains on FATF grey list, and (iii) greater monetary tightening.