After posting 18.7% gain in seven consecutive weeks, KSE-100 index succumbed to profit-taking, shedding 1.6% WoW to close at 39,621 points. Sectors such as Refineries, Cements, Autos, Steel, Power etc. who recorded a strong rally during the past two months witnessed selling during the week near the psychological level of 40k. This week was very happening from the govt’s perspective as it emerged victorious in two key areas. First off, the govt. successfully concluded negotiations with the Independent Power Producers (IPPs) installed under the 1994, 2002 and 2005 power policies for changes in their tariff structure. MoUs for proposed changes have been signed but this is just the first leg of tariff renegotiations amongst the govt. and power generation companies as similar understandings are likely to be reached with the pre-1994, govt. IPPs or otherwise CPEC-linked projects. Once in effect, renewed power purchase agreement (PPA) are expected to yield significant savings for the govt. in the form of reduced annual capacity payments and overall reduction in circular debt. Some of the key features of these agreements include: 1) reduction in current equity returns and 2) removal of USD indexation etc.

Apart from this, The Supreme Court (SC) ruled in favor of the govt. in the matter of Gas Infrastructure Development Cess (GIDC) which paved the way for collection of PKR 417Bn from the gas consumers in 24 installments. Both these developments, whilst positive from the standpoint of govt’s fiscal position, dented performance of key sectors such as Power, Fertilizers, Chemical etc as this would imply large cash outflows or outright earnings downgrade for the underlying companies.

Apart from the above, some important economic data releases during the week such as remittances, FDI and FX reserves also shed a positive light on the overall macroeconomic landscape. Remittances reported for the month of Jul’20 hit an all-time record of USD 2.8 Bn, taking investors by surprise. On the other hand, FDI in Jul’20 also posted a massive increase of 68% YoY (USD 114.3 Mn), indicating continued interest of investors, especially Chinese, in the country. Both these developments, along with slowdown in imports and inflows from the IFIs helped Pakistan post an improvement in its FX reserves by USD 139.1Mn (1.12% up WoW) to USD 19.6Bn. Global rating agencies also reaffirmed their confidence in Pakistan’s macroeconomic and currency outlook as S&P maintained Pakistan’s long term outlook as ‘Stable’ and Fitch Ratings also re-affirmed long term foreign currency outlook as ‘Stable’.

Market participation decreased by 24% during the week to 441mn shares while ADTO declined by 15% WoW to USD 107Mn. During the week, foreign investors continued to offload their positions as the net sell clocked-in at USD 4.0mn. This selling was mainly absorbed by insurance and individuals with inflows of USD7.9mn and USD7.2mn respectively.

Outlook

Moving forward, we opine that consistent declining trend in new COVID-19 cases and death ratio, stability in local currency backed by improved forex reserves will set the direction of the market. However, in the near term, we expect E&Ps and Banking sector to perform better than other sectors. Any dip in the market should be considered as an opportunity to accumulate fundamentally strong scrips. Our top picks include OGDC,HBL, MEBL and LUCK.