November, the best month since May’13

KSE-100 continued its upward trajectory for the third consecutive month, by rising 14.9% in Nov’19 (highest monthly return since May’13). Market has thus limited the CYTD decline to 6%.

Market activity improved significantly, with 60% mom jump in average daily traded value to US$40.

7mn. FIPI turned green with US$8.8mn inflows (vs. US$13mn outflow in Oct’19), while local mutual funds were also net buyers in Nov’19 after continuous selling since Feb’19.

Key checkpoints for the market are: (i) monetary policy in Jan’19, where we see a possibility of an interest rate cut, and (ii) a US$1bn Sukuk maturity in Dec’19 which might put temporary pressure on the exchange rate.

Major events during Nov’19

Status quo in MPS: In the Nov’19 MPS, the SBP maintained the key policy rate at 13.25%. The SBP noted that the current stance of monetary policy and real interest rates is appropriate to contain inflationary pressures amid meaningful improvement in twin deficits in recent months. We believe 1Q 2020 is when the rate cut cycle will begin. As such, ongoing economic contraction can persuade SBP to consider monetary easing by Jan’20.

COAS receives a 6-month extension: The Supreme Court announced that Gen Qamar Javed Bajwa will remain the Chief of Army Staff (COAS) for another six months, following the court’s concerns on the legality of the earlier-approved extension. The court made the decision after the government’s assurance that it would legislate on the army chief’s appointment and remuneration within six months.

C/A rises into surplus: Oct’19 current account balance clocked in a surplus of US$99mn (vs. CAD of US$1.28bn in the SPLY). The surplus came after a gap of four years (last seen during 3QFY15). The 4MFY20 CAD of US$1.47bn (down 74% yoy) reflects the effectiveness of recent macro adjustments. The improvement emanated from lower imports (down 23% yoy in 4MFY20) – particularly petroleum products – and a rebound in exports.

Successful IMF Review: After meeting bulk of the quarterly performance criteria with a comfortable margin, Pakistan successfully concluded its first IMF review. Pakistan met the conditions on reduction in primary deficit, zero borrowing from the central bank and cap on issuance of new sovereign guarantees. Disbursement of second tranche of c. US$453mn (SDR328mn) is expected in Dec’19.

Future Outlook

The market has rallied 25% since late Sep’19, but it is still trading at a forward P/E of 6.9x (based on IMS Universe). We think the rally can extend if macro improvement (falling twin deficits and softer inflation readings) can continue in coming months. However, near-term high inflation readings and an international Sukuk repayment are risk factors. We advocate remaining defensive in Banks, E&Ps and Fertilizers, given the slowdown in corporate profitability will likely extend until Mar’20, in our view. Our top picks are OGDC, UBL, HUBC and APL.( Courtesy : Intermarket Securities Limited)

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