Karachi, August 01, 2022 (PPI-OT): KSE100 at 20-month low, rebound hinged on macro and political clarity
Jul-2022: KSE100’s worst US$-based returns in 28 months
After two consecutive negative closes, July-2022 began with selective bottom-fishing and nascent optimism on macros. Investor confidence however took a step back after provincial elections in Punjab, which triggered political noise and concerns over its impact on macros. Pak rupee reported its worst month since May 1972, losing 14% in Jul-22. This also reflected in KSE-100 as the index declined 5% from its high of the month, taking MoM return to -3%. In US$ terms, KSE100 receded 17% (lowest since Mar-20). Cumulative returns for 7MCY22 clocked in at negative 10% (lowest since 2019 and 33% in US$ (lowest since 2008). In addition, PSX market cap declined to Aug-2009 levels to US$28bn.
Political and economic uncertainties – a bad mix
While we believe current macro-economic indicators do warrant reasons for investors’ concerns with low import cover, negative Net International Reserves and higher CPI readings, we believe a drastic reaction in equities and forex markets has been exacerbated by unending noise in domestic politics. Political clarity is hence among the key factors that could pave way to IMF and address jitters in both currency and equity markets. To recall, in the last round of PKR depreciation, equity markets gained a breather after IMF program and unlocked valuations with improving import cover, followed by re-rating of 35%-40%.
Frugal steps to reflect results from Jul-2022
The government and regulators have taken steps over the past couple of months to assert control on the macros, which include limited luxury imports and reportedly prioritizing essential imports and have finally reached to Staff Level agreement with IMF. Having said that, these steps, coupled with declining commodity prices, are expected to result in reduction of import volumes from Jul-2022 onward, bearing mix implications on the listed space over scarcity of imported raw materials, machinery etc.
Theme plays recommended in testing times
Current macros and developments direct towards a slowdown in economic activity, leading to cherry picking in the equity markets. Decline in demand is likely to continue in sectors such as Cement, Steel, Autos over lesser availability of imported raw material, rise in product prices amid cost pressures and slowdown in economic activity.
On the other hand, we believe the depreciating PKR against the US$ bodes well for export-oriented sectors, in addition to dollar-based revenue generating sectors such as E and Ps. Moreover, following the 125bp Policy Rate hike announced this month, the ongoing sharp depreciation may invite another round of monetary tightening in the meeting on 22nd Aug. Anticipation regarding the same may continue to shift preference of the smart money towards financials, albeit keeping credit cost as a key risk. Despite higher tax rate charges due to recent budgetary measures, we also highlight the ongoing result season would provide opportunities in companies and banks with stronger balance sheet and better dividend prospects.