The KSE-100 index witnessed a volatile week where index performance was largely dominated by announcement of monetary policy, outcome of the IMF review, hike in retail fuel prices and political noise. The week started on a bearish note as investors feared a rate hike in the MPC meeting while fate of IMF program remained unknown. At the same time, the ousted govt. of PTI announced its Long March to the capital on 25th May that further added fuel to the fire.
Subsequently, the policy rate was hiked by 150 bps to 13.75% to contain rising inflation and slow down domestic demand. Moreover, uncertainty continued to build on the resumption of the IMF program as the ultimate condition of reversal of energy subsidies was still not implemented. As a result, the index continued to face the brunt and performance remained unappealing.
Concerns regarding fiscal deficit continued to remain key as PDC for the month of May was projected at PKR 120Bn while Chinese power firms hinted of power shortage unless their receivables of PKR 340Bn were released. However, the sentiment partially improved as Saudi Arabia agreed to extend its USD 3.0Bn deposit to Pakistan by a further 12 months. Moreover, to resume the IMF program, the govt. agreed to reverse energy subsidies and increased the prices of petroleum products by PKR 30/litre. Eventually, this led to a shift in sentiment as the risk of default was mitigated. During the week, PKR touched an all-time high of PKR 202.5/USD before stabilising to close at PKR 199.8/USD (↑0.2% WoW). As for performance of the local bourse, the index moved between highs and lows of 43,555pts and 41,357pts to conclude at 42,861pts (↓239pts or 0.6% WoW). Trading volumes, on the other hand averaged 124Mn shares (↑20% WoW) while daily traded value was reported at USD 29Mn (↑24% WoW).
Resumption of the IMF program now looks likely; focus turns to the budget: Now that the foremost condition of reversal of fuel subsidies has been met, it seems as if the IMF program will resume shortly and the tranche of USD 900Mn will be released. However, uncertainty regarding the upcoming budget is still active as IMF has demanded some strict measures to be taken including a tax collection target of PKR 7.2Tn for FY23, reduction in CAD through import curbs and fiscal deficit to be addressed through various spending cuts. Moreover, uncertainty on the political front is expected to remain elevated as demand for new elections continues to take its toll.
On the monetary front, the Finance ministry is of the view that rates have peaked, and that further rate hike is not on the cards in the near term. It is pertinent to note, however, that in the PIB auction held this week, the government raised ~11% less than its said target but yields shot up by 24/70bps in 3/5 year bills to settle at 14.0/13.2%, respectively.
Major data releases during the week included: 1) POL products’ prices hiked by PKR 30/litre, 2) Policy rate increased by 150 bps to 13.75%, 3) SBP increases EFS/LTFF rates by 2% to 7.5/7% respectively, 4) Forex reserves declined by USD 11Mn WoW to USD 16.2Bn, 5) SBP raised PKR 89.4Bn in PIB auction where 3/5-year yields shot up by 24/70 bps respectively and 5) Govt. fixed urea prices at PKR 1,768/bag.
With the reversal of fuel subsidies, the resumption of IMF program looks increasingly likely. As a result, market performance in the short term is expected to remain upbeat. However, once the new budget is announced, there will be greater clarity on the fiscal front given inflation will cross 15% in the near term. That said, we advise adopting a ‘play it safe’ strategy and refraining from cyclicals and high beta stocks. We maintain our liking for Banks, E&P’s, Textiles and Fertilizer sectors.
Courtesy – BMA Research