Karachi, August 01, 2023 (PPI-OT): Index remained buoyant during July’23, returning 16.23%MoM
KSE100 Index closed on a significantly positive note during the outgoing month, with the index cumulatively appreciating by 6,700pts to end at 48,035pts. This gain represents the highest monthly percentage point increase in over 39 months (? 16.23%MoM).
Overall, the month was riddled with relatively positive news which was majorly driven by indulgence of the IMF to work with the country’s authorities once more after a delay of over 9 months.
Going forward, both the IMF and SBP are projecting external financing requirements of over US$22bn (exclusive of CAD), over 2.7x of SBP reserves. It is to be seen how the external financing relief is provided by lending partners, with the SBP’s governor expecting almost half of the debt stock to be rolled over during the period.
Refineries (?34.5%MoM) returned the highest during the outgoing month, closely fol- lowed by Commercial banks (?27.3%MoM) and Close-ended Mutual funds (?24.5%MoM), majorly due to talks of approval of the refinery policy and setup of a Greenfield refinery in a JV between Saudi Arab and local SOEs.
Total foreign portfolio’s net buying stood at US$18.2mn during the month. In relation to local participation, individuals maintained their position as the largest buyers, with a net purchase of US$2.3mn. On the other hand, mutual funds stood tall as the sellers, with net sales amounting to US$17.4mn during the outgoing month.
Index rises by 16.23%MoM: KSE100 Index closed on a significantly positive note during the outgoing month, with the index cumulatively appreciating by 6,700pts to end at 48,035pts. This gain represents the highest monthly percentage point increase in over 39 months (? 16.23% MoM). However, on an absolute basis, the rise is the greatest in over two decades, as the index appreciated by 6,700pts during July’23 wherein the largest gains seen last time were back in Dec’16 where the main board appreciated by ~5,200pts. Overall, the month was riddled with relatively positive news which was driven by indulgence of the IMF to work with the country’s authorities once more after a delay of over 9 months, inducing inflows and roll overs from KSA, UAE and Chinese commercial banks.
For this reason, the SBP’s FX reserves rose by US$3.7bn to end at US$8.19bn during the first three weeks of available data, with the reserves going as high as US$8.8bn during the first half of the month. Overall, statements from the domestic authorities remained relatively in line with the conditions set by the IMF in the program's structural benchmarks, including committing to refrain from granting further subsidies, efforts to address gas/power sector circular debt, removing administrative curbs on import channels and overall fiscal/monetary prudence. Overall, the said external account positivity reflected sharply in US/ PKR parity, where the domestic currency gained by as much as 4% during the month, however ending the period at PkR286.6/US$ (decline of 0.2%MoM). On the index side, average traded volumes on the main board stood at 187mn, a sharp uptick of 135%MoM vs. 80mn shares in June’23. Finally, the market capitalization of the KSE100/KSEALL stood at US$20/25.2bn, up by 14.4%/13.3%MoM.
Strengthened external position, long term challenges uncertain: Jun’23 saw another current account surplus of US$334mn, taking cumulative surplus to US$1.38bn since Mar’23. Going forward, both the IMF and SBP are projecting external financing requirements of over US$22bn (exclusive of CAD), 2.7x of SBP reserves. It is to be seen how the external financing relief is provided by lending partners, with the SBP’s governor expecting almost half of the debt stock to be rolled over during the period. Finally, inflationary pressures are expected to succumb to declining aggregate demand and multi-year high interest rates. For this reason, CPI for the month of June’23 expected to clock in at 26.7%YoY vs. 29.4%YoY in June’23, with FY24 CPI to average between 20-22%.
Refinery/Banks/CE-Mutual fund sectors take the lead: Refineries (?34.5%MoM) returned the highest during the outgoing month, closely followed by Commercial banks (?27.3%MoM) and Close-ended Mutual funds (?24.5%MoM), majorly due to talks of approval of the refinery policy and setup of a Greenfield refinery in a JV between Saudi Arab and local SOEs. On the FIPI front, banking sector saw the greatest net inflows from foreign portfolios (US$10.63mn), with Tech and Cements following close by with net inflows of US$2.99/2.49mn. Total foreign portfolio net buying stood at US$18.2mn during the month. In relation to local participation, individuals maintained their position as the largest buyers, with a net purchase of US$2.3mn. On the other hand, mutual funds stood tall as the sellers, with net sales amounting to US$17.4mn during the outgoing month.
Investment Perspective: Going forward, a successful follow through on IMF’s standby arrangement alongside much sought after political stability (announcement of election dates) will determine the market’s fate. With the market returning over 16% during the month, we expect further upside to remain narrow due to record high benchmark rates amidst questions marks about external positions over the course of the year. Overall, market still remains at attractive valuations with a forward PE of 3.53x, while with the backdrops aforementioned, we advise investors to take a cautious approach and investments should be made in dollar denominated sectors (E and Ps and Technology) or companies with healthy dividend yields.