Karachi, July 04, 2023 (PPI-OT): Pakistan Strategy - FY23 Market Review and Outlook

KSE100 Index closed relatively flat during FY23, with the index falling cumulatively by 179ppts to end at 41,453 points, decline of 0.21%YoY during the period.

The Economy remained in a precarious situation throughout the fiscal year with several key macroeconomic indicators reaching record levels e.g. policy rate (22% in June’23), CPI (38%YoY in May’23) an LSM (?24.5%YoY in Mar’23, 3 years low).

Major commodities have significantly declined from their peak levels in May/June’22, which were a result of the ruckus in Eastern Europe, as well as the recovery of major economies from the low points caused by the COVID-19 pandemic

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.

Externalities continued to haunt the market: KSE100 Index closed relatively flat during FY23, with the index falling cumulatively by 179ppts to end at 41,453 points, decline of 0.21%YoY during the period. The index’s highs and lows stayed between 43,677 (17th Aug’22) and 38,342 points (17th Jan’23), with the average traded volume for the bourse during the year standing at 90.8mn shares, marking a decline of 21%YoY vs. FY22 period end. The year was characterized by a combination of economic, political, and exogenous challenges. Natural calamities such as floods affected the provinces of Sindh and Punjab, leaving approximately 3 million people stranded and resulting in economic losses of around US$30bn.

Political unrest arose due to factors such as provincial assembly by-elections, the disqualification of political figures, and the arrest of PTI chairman Imran Khan, which led to countrywide riots in May’23. These events further strained civil-military relations in the country. Overall, market capitalization of the KSE100 index fell by 8.6%/34.5% in rupee/US$ terms, to presently stand at PkR6.36tn and US$22.24bn,

respectively. On the currency front, PkR closed at PkR286.5/US$, reflecting a downgrade of

39.6%YoY from PkR204.8/US$ from June’22 end.

Economic survival hung in balance throughout FY23: The Economy remained in a precarious situation throughout the fiscal year with several key macroeconomic indicators reaching record levels e.g. policy rate (22% in June’23), CPI (38%YoY in May’23) an LSM (?24.5%YoY in Mar’23, 3 years low). These challenges were primarily caused by administrative restrictions on imports, which adversely affected the production and industrial sectors. As a result, sectors such as auto-mobiles, appliances, power, and steel (among others) faced significant disruptions in their production processes. The import restrictions were implemented to address the dwindling FX reserve situation, which presently stand at US$4.1bn, compared to US$9.2bn in FY22 end, reflecting a decrease of US$5.1bn during the fiscal year.

Overall, the country's GDP growth has come to a halt, with projected expansion of only 0.29% for the fiscal year ending on June 30th. Key economic events during the year included the across-the-board rebasing of electricity tariffs by PkR7.9/kWh, approval and receipt of a US$1.16bn tranche from the IMF for the 7th and 8th reviews in Aug’22, repayment of a US$1.0bn Eurobond due in Dec’21, the State Bank of Pakistan's reserves hitting a record low of US$2.9bn in early Feb’23, an increase in gas tariffs by up till 110% across various slabs in Feb’23, the introduction of a mini-budget including new taxes worth PkR170bn during the same month, the unveiling of the federal budget with revenue collection exceeding PkR9.2tn, and finally, a 100 basis point increase in the policy rate, reaching an all-time high of 22%.

Commodities have largely receded: Major commodities have significantly declined from their peak levels in May/June’22, which were a result of the ruckus in Eastern Europe, as well as the recovery of major economies from the low points caused by the COVID-19 pandemic. Major crude oil indexes, including Brent, WTI, and Arab-Light, have remained down by 34-35% vs. June’22 end, dropping from their highs of $110-$120/bbl. during the year to presently hover in

mid US$70s per bbl. The said decline in major commodities was due to dampened demand prospects in major economies including Europe, China, and the US. Additionally, central banks worldwide remained persistent in raising rates to combat the spiralling inflation. The said inflationary pressures arose primarily due to energy shortages (majorly in Europe) and the implementation of looser monetary policies back in 2020, aimed at stimulating demand following the impact of the COVID-19 pandemic. Other commodities that have experienced significant declines from their previous high levels include Coal (?69% YoY), RLNG (?68% YoY), Urea (?55% YoY), and PVC (?38% YoY).

FY23 FIPI net position: Foreigners remained the net buyers of US$1.53mn during the outgoing

year, with major inflows observed in sectors Tech (+US$43mn), Oil and Gas (+US$27.4mn) while Banks (-US$54mn) bore the brunt of the outflows. Cumulatively, Mutual funds (-US$134mn) and Insurance (-US$123mn) saw their portfolios witnessing the largest net outflows while Companies and Individuals absorbed most of the selling throughout the year, indicating a net buy of US$101mn and US$83mn, respectively.

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. However, we expect market upside to remain narrow due to record high benchmark rates alongside the country's dwindling external position. Overall, market remains at attractive valuations with a forward PE ratio of 3.3x, 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.