The KSE-100 was flat in May 2020 (down 0.5% mom), taking CY20td decline to 17%. There were some positive triggers, including the partial lifting of lockdown conditions by the government and the SBP cutting the policy rate further by 100bps to 8%. However, both failed to lift market sentiment.
Market activity fell 9% mom to c.US$46mn average daily traded value. FIPI outflow (US$40mn in May) continued for the fourth consecutive month since the onset of Covid-19 pandemic. International oil prices rose c.35% mom (as markets cheered easing of lockdowns globally); PKR/USD depreciated 2%to c.163.
With the dislocation in Pakistan being progressively eased off, major concerns for the market are an accelerated rate of infections (which can reverse the easing) and the FY21 Budget announcement in June. News-flow on the latter have been mixed; while the MoF is proposing tax reliefs despite swelling fiscal deficit.
Major events during May 2020
Lifting of lockdown conditions: In line with several countries, Pakistan government eased lockdowns effective 11 May (ahead of Eid), overweighing concerns on the economy (and the plight of poor) despite a still-rising trend of infections (which have accelerated ever since). In place since 24 March, the dislocations led to zero sales of cars in April, exports plummeting 54% yoy, disruption in Urea supplies, and c.19% yoy lower cement dispatches, among others. We do not rule out the risk of government reinstating stricter lockdown measures, because of the present pace of infections.
SBP cuts interest rates by 100bps: This was the fourth cut in the policy rate (now at 8%) since mid-March, taking cumulative easing to 525bps. The government simultaneously approved a PKR50bn stimulus package for Agriculture, which entails fertilizer subsidies. The Ministry of Finance is reportedly mulling tax reliefs for the upcoming FY21 Budget announcement (due 12 June), while the fiscal deficit for FY20 is estimated to cross 9%. The IMF, however, has suggested more tax measures.
Local pharmaceutical companies to supply Covid-19 medications: Feroz Laboratories (FEROZ) has signed an agreement with Gilead Sciences for local manufacturing of its drug Remdesivir, which has proved efficacious in treating Covid-19 patients (by the US FDA). Searle Company (SEARL) has separately agreed (exclusively) with a Bangladeshi company, Beximco Pharma, to supply the same drug in Pakistan. With many global pharma companies (some also present in Pakistan) working on a vaccine, we think market interest in the sector will remain strong in the near term (the sector rallied c.7% in May).
Pakistan Market staged a flattish performance in May despite two major positive triggers – the easing of lockdown and MPS. The March results season (earnings down c.7% yoy for the companies we track) has dampened sentiment as well. The future market direction will be shaped by any surprises in the upcoming Budget announcement, where higher-than-expected PSDP allocation or notable tax reductions can be key catalysts (however, low likelihood). Major concerns remain the accelerated buildup of Covid-19 cases in Pakistan and the broadening of twin deficits, which, if not tamed, threaten to keep economic activity below par for longer, in our view. Our top picks are ENGRO, OGDC, UBL, INDU, and MTL.