- The KSE-100 lost nearly a quarter of its market cap, falling 23%, in March 2020 (worst month since the 2008-09 crisis). The unprecedented pessimism was led by the unabated spread of coronavirus globally – where the MSCI World / EM indices were down 13%/ 17% mom – along with a countrywide lockdown in Pakistan. A 225bps cut in interest rates by the SBP could not appease the market sentiment.
- Market activity, however, rose sharply by 37% mom to US$56mn average daily traded value. FIPI outflow of US$85mn was the worst since November 2018. International oil prices fell 54% mom (worse than 2014-15 collapse) and PKR depreciated 8% against the US$.
- Key variable for the market is when the dislocation in Pakistan will end and economic activity can resume (even if gradually initially). From our discussions with many corporates, most expect losses in the April-June quarter and a gradual recovery until September 2020.
Major events during March 2020
The Covid-19 outbreak: Total coronavirus cases and deaths globally rose 10x in March, while in Pakistan c.1,900 cases and 26 deaths have been reported. Globally, this has culminated in widespread lockdowns, travel bans, and investors’ flight to cash from risky assets. Many central banks, including the US Fed, cut interest rates sharply and announced significant stimulus plans to mitigate the economic impact of the outbreak. Pakistan followed suit.
SBP cuts interest rates by 225bps: The State Bank of Pakistan (SBP) cut the policy rate twice during the month, cumulatively by 225bps, taking it to 11.0%. The government simultaneously announced a PKR1.2tn stimulus package to protect the poor and the most vulnerable sectors. These include handouts to the poor, reduction in petrol prices, and deferment of payment of utility bills. The SBP also allowed borrowers to defer principal payments for a year.
Oil prices halved: A notable positive for the Pakistani economy is the sharp decline in international oil prices (Brent fell to a multiyear low of US$22/bbl) amid breakdown of consensus on production cuts between Russia and OPEC. This will contain inflationary pressures in Pakistan (from any food shortages) and has delayed increase in power and gas tariffs. The PKR slipped 8% against the US$, largely due to c.US$1.8bn outflow from government securities. Going forward, the extent of the decline in exports and remittances will shape economic outlook, in our view.
Pakistan’s Market cap to GDP of 13% vs. a historical mean of 22%; it is even lower than the levels seen in 2008-09. Hence, risks have been overplayed and the market is overlooking the resilience some large companies can exhibit in the present environment, in our view. From our discussions with corporates in several industries, we understand that most of them are expecting slow recovery June onwards and normalcy to return by September. Even though an extended lockdown (beyond April 2020) will be negative for most sectors, the construction sectors are most vulnerable given high leverage (albeit the larger companies can utilize their short term investments and available borrowing capacity to make interest payments). Pharmaceutical, Food and Fertilizer sectors are least affected by the lockdown. Companies with low leverage and high dividend yields are most preferred. We have a cautious stance on Cement, Steel and Textiles. However, as the economic situation will move towards normalcy, quality names in these sectors can stage the strongest rally. Our top picks are ENGRO, HUBC, OGDC, UBL and INDU.