The KSE-100 index posted a jump of 1,084 points / +2.6% MoM during Nov’22 to close at 43,349 points. Early on during the month, the Finance Minister assured that monetary support from friendly countries and other multilateral partners will soon be reflected in the reserves position, which aided market gains. Furthermore, the trade deficit narrowed down by 26.59% to USD 11.469bn during the first four months of the current fiscal year compared to USD 15.624bn during the same period of last year, and reserves displayed an inflow of USD 1.5bn from ADB, which further propelled the equity bourse.
Albeit, the overarching focus of investors was pinned on political news. Whereas pressure on the PKR/USD parity to nearly 223.95/USD vs. 220.89/USD in Oct’22, indicative of falling SBP reserves as debt repayments continue to wash off any inflows, coupled with a surprise 100bps hike by the Central Bank in response to an overpowering rise in inflation, eroded earlier returns. However, the State Bank remains confident of making the bond payment earlier than the due date in the first week of Dec’22, addressing another big concern that kept market participants wary in Nov’22.
Major News
Petroleum sales decrease by 22% in 4MFY23, July-Sept inflation stands at 25.1%, Pakistan, KSA to sign several pacts, 9th IMF review: Framework yet to be finalized, FBR officials meet CFOs of large firms on tax filling, Govt raises Rs46b through Sukuk, Jul-Oct textile group exports down 1.34pc YoY, 22-day cover for petrol / 19-day cover for HSD in hand: Ogra, Hubco-backed firm agrees to buy Eni business, Banking sector spread increase by 86bps MoM in Oct’22, Technology exports up by 7% MoM during Oct’22, PM Shehbaz makes a two-day official visit Turkey, Pakistan receives $500mn from AIIB: finance ministry, Bajwa hands over baton of command to Munir, IMF, govt begin virtual engagement, Policy rate hiked to 16%, and Pakistan to repay $1bn bond on Dec 2: SBP chief.
Outlook and Recommendation
After some delay witnessed in the IMF’s ninth review and September-end performance criteria, which was previously scheduled for 3rd Nov’22, the incumbent government and the IMF have begun virtual engagement. This remains critical for Pakistan as its reserves continue to deplete despite inflows from ADB, World Bank and AIIB in the last few weeks, given debt repayment obligations.
With a scheduled payment of the USD 1bn bond due in the current week, and scheduled repayments of USD 26.3bn till Oct’23 (source: SBP; as of Oct’22), go ahead from the IMF will invariably instill confidence in other bilateral and multilateral partners to provide Pakistan the necessary monetary support.
Moreover, the recent surprise hike of 100bps in the State Bank’s benchmark policy rate has once again taken the focus away from economic growth towards curbing inflation, and yet, a clear path has still not been established. Debate over peak level of the policy rate is making the rounds, while KIBOR at nearly 17% has spooked leveraged industries. Albeit, Commercial Banks remain key beneficiaries of the same.
For other industries, weakness in international commodities is a key consolation; dip in international oil prices will be positive for transportation, freight and general inflation levels, whereas decline in coal will be positive for the cement sector. While lower oil prices will also aid the current account position.
In addition, the recent revision in OMC margins to PKR 4/ltr for MS and PKR 5/ltr for HSD, will bode well for the Oil Marketing Companies. It is also expected that this will further be increased to PKR 6/ltr by mid-December.
We also highlight that barring two out of the last 10 years, the stock market has posted positive returns for the month of December. We believe a similar trend will be witnessed this year given successful IMF talks and timely bond repayment.
The KSE-100 is currently trading at a PER of 4.1x (2023) compared to Asia Pac regional average of 12.8x while offering a dividend yield of ~10.2% versus ~2.8% offered by the region. Our preferred stocks are OGDC, PPL, MARI, MCB, FABL, MEBL, BAFL, LUCK, MLCF, FCCL, ENGRO, FFC, HUBC, PSO and SNGP.
Courtesy- AHL Research