Equity Analysis /

Pakistan: KSE-100 – Big jolts lead to deep correction

  • The KSE-100 index lost 8.8% in Feb’20, due to spike in CPI, delays in second IMF review, global outbreak of coronavirus

  • Market activity also fell by 31% mom to US$41mn AVTD. FIPI turned red again with an outflow of US$56mn

  • Checkpoints: (i) CPI for February & March MPS, (ii) a new Textile Policy, and (iii) global developments on coronavirus

Intermarket Securities
2 March 2020
  • The KSE-100 index lost 8.8% in February 2020, as a large CPI reading for January and delays in conclusion of the second IMF review affected investor confidence. This was exacerbated by a rapid outbreak of coronavirus beyond China. MSCI EM index fell 6% during the month.
  • Market activity also fell sharply by 31% mom to US$41mn average daily traded value. FIPI turned red again with the largest monthly outflow of US$56mn in past 15 months (FYTD outflow of US$39mn).
  • Key checkpoints for the market are: (i) CPI for February and next MPS in March, (ii) a new Textile Policy to be announced by the govt, and (iii) global developments on the containment of coronavirus. 

Major events during February 2020

January inflation of 14.6%: The CPI reading of 14.6% for January 2020 (highest since January 2011) well exceeded market expectations. It was largely caused by a significant Food inflation (up 24% yoy) amid supply disruptions in some major food items. This sparked concerns that  monetary easing could be delayed until 2HCY20 if CPI readings remain high (yields on 12mth T-Bills and PIB auction rose during the month). However, the government has been able to address the issue and food prices came down substantially  in February (consequently, CPI for the month is estimated lower than 13% yoy). 

Delayed conclusion of IMF Review: The conclusion of the second IMF staff-level program review was delayed until the end of month. Reportedly, key points of contention were Pakistani authorities requesting for a deferment of gas and power tariffs and reduction in the FY20’s FBR tax collection target to PKR4.7tn from PKR5.2tn set earlier (already cut in the first review). The IMF staff ultimately recommended the disbursement of third tranche of PKR450mn (due for IMF BoD approval), ostensibly agreeing to the delay in tariff hikes. 

Global epidemic of COVID-19: Global markets corrected sharply towards the end of February, on realization that the novel coronavirus is spreading fast beyond its epicenter in China with many cases reported in South Korea, Iran and Italy (4 cases reported in Pakistan). Many corporates in Pakistan have expressed concerns about possible disruption in their supply chains if the outbreak extends beyond six months. 

Other key developments: (i) In the FATF review, Pakistan was deemed largely compliant on 11 of the 27 action items and escaped blacklisting. The FATF has urged Pakistan to complete the targets by June 2020. (ii) LSM data for January was surprisingly positive, rising 9.7% yoy (contacted 3.4% yoy in 7MFY20) led by a recovery in Consumer sectors. (iii) Fertilizer producers reduced the price of Urea in the range of PKR170-300 per bag, even though GIDC for the sector had been reduced by PKR400/bag. 

Future Outlook

We believe the correction in February was overdone. A potentially softer CPI reading for February and global containment of the coronavirus outbreak ahead of summer months can help appease investor concerns and reverse the market trajectory, in our view. We do not rule out a preemptive cut by the SBP in March MPS (in line with other central banks globally). The market is presently trading at a forward P/E of 6.2x. We advocate remaining Overweight in select defensive stocks. Our top picks are OGDC, UBL, ENGRO, HUBC and MEBL. Among the cyclicals, we prefer LUCK, DGKC, ISL and INDU.