Karachi, September 01, 2023 (PPI-OT): Pakistan Strategy - Aug’23 Market review and outlook

KSE100 index faced downward pressure throughout the month of August, witnessing a correction of 3,032pts to conclude at 45,002 points, marking a 6.3%MoM drop. KSE100 daily traded volume remains lackluster averaging 165mn shares vs. average of 186mn shares in the previous month, signifying a 12%MoM decline.

The current account also reported a deficit after a 4-month streak of surplus, recording a deficit of US$809mn, primarily due to the easing imports.

Sector-wise, Leasing and auto parts sector took the spotlight with a total gain of 10.6%/4.7% MoM. On the flip side, OMC sector led the downward trend with a cumulative monthly loss of 15.1%MoM.

Moving ahead, market hinges on outcomes of 1) upcoming MPC meeting on Sep-14, 2) next review with IMF in Oct and 3) developments related to energy reforms.

Index fall by 6.3%MoM: KSE100 index faced downward pressure throughout the month of August, witnessing a correction of 3,032pts to conclude at 45,002 points, marking a 6.3%MoM drop. The month initially began on a bullish note, driven by news regarding the resolution of gas circular debt and refinery policy. However, the positivity did not sustain long as primarily due to sharp devaluation of the rupee, current account deficit, and delays in energy reforms. Additionally, the long-awaited announcement of the Refining Policy (Brownfield) came through during the month, ensuring long term catalysts for the domestic players in the sector. Rampant inflation and news flows of another interest rate hike further eroded investor confidence. Market participation remained lack clustered throughout the month, with the KSE100 daily traded volume averaging 165mn shares vs. average of 186mn shares in the previous month, signifying a 12%MoM decline. The rupee devaluation during the month resulted in a 12.4%MoM reduction in the dollarized market capitalization, which currently stands at US$17.4bn.

Macro headwinds return: The current account also reported a deficit after a 4-month streak of surplus, recording a deficit of US$809mn, primarily due to the easing of imports. The increase in imports also exerted pressure on the rupee, which devalued by 6.6% during the month, closing at PkR305.5/US$. Additionally, the gap between the interbank and open market exchange rates remained around 3-5% during the month. Although, according to the IMF Stand-By Arrangement (SBA) agreement, this gap should be within the range of ±1.25%. Furthermore, Fx reserves continued to decline, falling by US$322mn during the month and as of August 25th, the SBP held reserves stand at US$7.8mn. Additionally, inflation remains high, with the CPI for July 2023 reaching 28.3% and is expected to remain elevated for the next month’s owing to fuel and electricity price hike. Petroleum prices have also exceeded the PkR300 mark, with current prices for petrol and high-speed diesel (HSD) standing at PkR305/312 per litre, respectively.

Monthly sector performance roundup: Sector-wise, leasing sector took the spotlight with a total gain of 10.6%MoM. Additionally, the Auto Parts sector performed well with a 4.7%MoM gain, driven by the relaxation of import restrictions and better than expected quarterly results. On the flip side, OMC sector led the downward trend with a cumulative monthly loss of 15.1% MoM due to persistent issues related to receivables. Other sectors that posted significant losses include the Chemical ((Down) 14.8%MoM), Refinery ((Down) 14.6%MoM), Power sector ((Down) 14.4%MoM).

Insurance and companies lead buying: Flow-wise, Insurance and companies were the most significant buyers with net purchases of US$36.4mn and US$17.9mn, respectively. Additionally, foreign investors remained bullish on the market, with a healthy net inflow of US$12.9mn. Foreign investors were primarily involved in the Banking, E and P, and Tech sectors, with net inflows of US$6.4/5.6/3.8mn, respectively. On the flipside, Banks and Mutual Funds remained largest sellers in the market, with net sales amounting to US$21.5mn and US$20.0mn, respectively.

Investment Perspective: Moving ahead, market’s performance is hinged on the outcome of 1) next MPC meeting on Sep-14, 2) upcoming review with IMF in Oct and 3) developments related to energy reforms/circular debt. In the event of interest rate hike, cyclicals may face the heat, although market is believed to have already priced in some of this impact. Overall, we keep advising our clients to take a cautious approach and investments should be made in sectors with dollar denominated revenues (E and P and Tech) or companies with healthy dividend yields.