The KSE-100 bounced back in April 2020, rising 17% mom, after a sharp 23% decline in March. The rally was led by (i) government decision to ease off lockdown conditions for certain industries, (ii) an emergency 200bps cut in the policy rate, bringing it to 9.0%, and (iii) a massive 62% slump yoy in global oil prices. MSCI World / EM indices were up 11.0%/ 9.0% mom.
Market activity, however, came down by 11% mom to US$50mn average daily traded value. Foreign selling narrowed to US$69mn (vs US$85mn in March) and was concentrated in Banks and E&Ps. International oil prices (Brent) recovered 11% mom while the PKR appreciated 4% against the US$.
With a rise in Covid-19 testing, total confirmed cases in Pakistan has risen to 20,130 with the mortality rate remaining at 2%. A flattening curve of cases and resultant spur in economic activity will determine future market direction. Corporate profitability is beginning to show signs of stress with higher-than-expected losses from cyclical sectors and higher loan provisioning observed in banks.
Major events during April 2020
Construction and export industries allowed to reopen: Following much outcry over industry closure, PM Imran Khan allowed the construction and other essential industries to resume operations in a phased manner; however, the Sindh province maintained strict lockdown conditions. In concert with earlier announced stimulus package and multiple interest rate cuts, this helped allay investor concerns on the economic fallout of an extended lockdown. Total number of reported Covid-19 cases rose 10.6x mom to 20,156 with 459 deaths. However, this is also due to higher number of testing.
SBP cuts interest rates by another 200bps: The State Bank of Pakistan (SBP), in an emergency meeting, cut the policy rate by another 200bps (425bps cumulatively) to 9.0% (third cut since March MPS). SBP partly reasoned it with GDP growth estimates of -1.5%/2.0% in FY20/21f (same as that of IMF) and an improved inflationary outlook.
New IMF program of US$1.4bn: The Rapid Financing Instrument (RFI) program aims to support Pakistan against any balance-of-payment fallout while dealing with the pandemic. Importantly, IMF has relaxed the contingencies of the existing EFF program, but has advocated returning to reforms once the outbreak is adequately contained. The RFI program is in addition to other multilateral assistance and a cumulative US$1.7bn debt relief by G20 countries in the shape of one-year suspension of repayments to bilateral creditors.
Future Outlook
In the ongoing March result season, overall corporate profitability has shown signs of stress, which will likely worsen in the June results. That said, with multiple relief measures announced by the Government for industries and other borrowers, market perception of economic risks should improve in the coming months. With several industries beginning to reopen both domestically and globally, economic activity should continue to rebound (albeit more strongly after Ramadan). Pakistan’s Market cap to GDP has fallen to 13% vs. a historical mean of 22%; it is even lower than the levels seen in 2008-09. With the defensive sectors likely coming under stress hereon, we advocate gradually tilting portfolios towards quality names in the cyclical space. ( Intermarket Securities Limited)