A review of KSE-100 performance during August 2024 amid mixed economic indicators

The KSE-100 index showcased mixed momentum during Aug’24, clinging on to the expectation of approval of IMF’s EFF program and disbursement of loans.
At the start of the month, Pakistan secured one-year debt rollover commitments from China, Saudi Arabia, and UAE, a crucial step before the final approval of the USD 7 bn loan program.
Furthermore, in the MSCI review, Pakistan’s weight in the FM space increased to 3.9%.
Meanwhile, the T-bill auctions during the month showcased a significant drop across the tenors, increasing expectations of a rate cut in the MPC meeting in Sep’24.
Moody upgraded Pakistan’s rating to Caa2 from Caa3.
However, Pakistan’s absence from the IMF’s Executive Board schedule in August ’24 caused a few jitters in investors’ sentiment.
The SBP reserves climbed up by USD 111.6mn MoM to USD 9.4bn.
The market closed at 78,488 points, gaining 601points | +0.8% MoM.

Major News

FY24: Oil production up; gas’s down; Oil, gas depletion trend reverses, Fauji Fertilizer Bin Qasim approves land sale to Fauji Foundation; Pakistan’s urea sales dip 3% YoY in July 2024, Cement sales fall 7% as economic activity slows, Pakistan auto sales dip by 36% in July 2024, Riyadh offers 15% equity investment in Reko Diq, Fatima Fertilizer Decides to Acquire Shares, Financial Instruments of Agritech Limited, July petroleum imports soar 60% to USD 1.3bn, July textile group exports down 3.1% to USD 1.27bn YoY, Agha Steel receives acquisition notice from Fauji Foundation, OGDCL announces second gas discovery in Mari East Block, Engro Fertilizers base plant resumes operations after maintenance, and power generation rises 10.5pc MoM.

Economic developments

Pakistan reported a current account deficit of USD 162mn in Jul’24, a significant improvement from the USD 741mn deficit recorded in Jul’23. The reduction in the deficit is largely attributed to a 48% YoY increase in remittances. In Jul’24, total imports, including both goods and services, declined by 1% compared to last month. Meanwhile, the YoY comparison for Jul’24 depicts a 12% jump in total imports compared to SPLY. Whereas, services imports in Jul’24 declined to USD 781mn, reflecting an 8% decrease YoY and a 25% decrease MoM. In Jul’24, the import of goods saw an increase of 16% YoY | 4% MoM, reaching a total of USD 4.8bn. In Jul’24, the total exports, including both goods and services, reported a 2% decrease on MoM basis, while going up by 11% YoY.
In Jul’24, remittances from overseas Pakistanis totalled USD 3.0bn, reflecting a 5% MoM decline from USD 3.16bn in Jun’24. However, on a YoY basis, remittances increased by 15% from USD 2.03bn in Jul’23. Inflows from KSA clocked-in to USD 761mn, showing a 56% YoY increase but a 6% MoM decrease. Whereas, the remittances from UAE were USD 611mn, down 94% YoY | 7% MoM. Moreover, contributions from United Kingdom totalled USD 443mn, experiencing a 45% YoY decrease and a 9% MoM decline. In addition to this, European Union remittances settled at USD 351mn, marking an increase of 24% YoY | 6% MoM. On the other hand, Foreign direct investment (inflow) settled at USD 136mn in Jul’24, compared USD 83mn during Jul’23. During Jul’24, China emerged as the leading contributor to net FDI, recording a net FDI of USD 45mn, followed by the Hong Kong with a net FDI of USD 42mn. In terms of sectors, the power sector attracted the most significant investment during Jul’24, totaling USD 62mn, followed by the oil and gas exploration sector with USD 30mn during the same period. Portfolio investment inflows totaled USD 169mn, with USD 145mn from investments in debt securities, up 24x YoY amid high interest rates and PKR stability. While, USD 5mn outflow was witnessed in equity and fund shares against an inflow of USD 27mn recorded last month
In Jun’24, the Pakistan Bureau of Statistics reported no change in the production levels of Large Scale Manufacturing Industries (LSMI), standing at 108.6. When comparing MoM data for Jun’24, the LSMI declined by 4.7%.

Outlook & Recommendation

In the next month, IMF Executive Board’s approval and the disbursement of the first tranche of the new EFF will be the major highlight. Whereas, the ongoing result season (4QFY24/2QCY24) will keep certain scrips in the limelight. Moreover, the Monetary Policy Committee meeting is scheduled on 12th Sep’24, where a cut in policy rate could further boost market momentum, especially highly leveraged sectors. Moreover, changes announced by MSCI in its global indices constituents will be applicable from Aug’24 closing.

We project that inflation for Aug’24 will decrease to 9.6% YoY, compared to 27.4% in Aug’23 and 11.1% in Jul’24. The anticipated decline in inflation to a single-digit level is likely to result in widening of the real interest rate to ~10%. We anticipate that single-digit inflation will persist in the latter half of CY24, provided there are no external shocks. Such shocks could negatively affect our projections, including rises in international prices, significant fluctuations in PKR volatility, or a substantial increase in the trade deficit.

The KSE-100 is currently trading at a PER of 4.1x (2025) as compared to its 5-year average of 5.9x while also offering a dividend yield of ~10.4% as compared to its 5-year average of ~8.2%. Our preferred stocks are OGDC, PPL, MCB, UBL, MEBL, LUCK, FCCL, DGKC, MLCF, FFC, PSO, HUBC, HTL, ILP, NML and, INDU.

Courtesy – AHL Research