Bullish momentum continued with the KSE-100 rising 6.0%mom in January 2021 (vs. 6.5% mom in Dec’20) led by optimism on Covid-19 vaccine availability in Pakistan, and SBP’s guidance on gradual increase in interest rates – which cloaked a large C/A deficit in Dec’20.
Market activity rose to c.US$205mn average daily traded value vs. US$191mn in the previous month. Foreign investors turned net buyers in Banks after 13mths and E&Ps after 4mths of net selling. FIPI outflow came off to US$1.8mn (vs. average c.US$50mn per mth during CY20).
We expect the rally to continue with the KSE-100 index still trading at a large valuation discount. With corporate profitability coming off a multi-year low and entering 2021 with a strong momentum, we think the Index can reach an all-time high of 54,500pts by December 2021.
Major events during January 2021
Pakistan secures procurement of Covid-19 vaccines: The Government secured 17mn doses of the AstraZeneca vaccine from COVAX to be received in 1HCY21 (first batch in March 2021). In addition to this China decided to donate 500,000 doses of Sinopharm vaccine making Pakistan one of the first countries, to which China will supply the vaccine. Additionally, the drugs regulator DRAP granted permission to AGP for marketing and distribution of a Russian vaccine (Sputnik V) for emergency use. These developments has helped to sustain investor optimism, in the face of the second wave of Covid-19.
Policy rate maintained – guidance for unchanged interest rates: The SBP maintained the policy rate at 7.0% for the third consecutive time in the monetary policy meeting. Importantly, for the first time in recent years, SBP guided to keep interest rates unchanged in the “near term” (in the absence of a new external shock); and any future increase in rates would be gradual, unlike the abrupt large changes in the recent past. Broadly, the SBP considers that inflation is likely to remain within the projected range of 7-9% and the present monetary policy is appropriate for the still-nascent economic recovery to last.
Current account deficit after six months: The C/A balance turned negative to a deficit of US$662mn in Dec’20 vs. five consecutive surplus in the prior months led by a sharp rise in imports (up 17% mom). That said, remittances and exports remained strong, posting near all-time high levels. LSM output grew 14.5% yoy in November on strong rebound in industrial activity. Fx reserves fell below US$13bn at the end of January, but PKR/ US$ remained largely stable to close at 160.
IPPs initialed master agreements for PPA amendments: 41 out of 47 IPPs that signed MoUs with the government in August 2020 initialed master agreements at the end of January, paving the way for about PKR450bn of outstanding circular debt payments from the government (divided into two tranches of 60% and 40% to total). The government will finalize the timeframe in the second week of February 2021. This led to a sharp 17% rise MTD in the listed Power sector (second best performing sector in January after Telecom).
Outlook
We expect the rally to continue where key factors are the ongoing macro-economic improvement and rising corporate profitability, while interest rates may remain unchanged until July 2021. Also, the rally is likely to be broadbased; our top picks include DGKC, LUCK, BAFL, HBL, POL, PSO, FFC, INDU, MTL, NML and EPCL.
(Intermarket Securities Limited).