Karachi, June 01, 2022 (PPI-OT): May-2022: All eyes on Budget FY23
Highest losses in eight months
A rollercoaster month, filled with macro developments, ended with the KSE100 Index down 4.8% MoM, wiping out the cumulative gains made during 4MCY22. The negative performance was reported despite a 2.7% recovery in the last 5 trading sessions of the month, marking it as the worst month since Sep-2021. With this, the KSE100 performance for 5MCY22 reached to negative 3.4%.
Moreover, the negative return for the month magnified in dollar-terms to 11%, as the PKR depreciated by 6.6% against the US$, highest depreciation since Jun-2019 (barring the lock-down period where PKR depreciated by 7.7% during Jun-2020). In dollar-terms, the KSE100 witnessed the worst month since Mar-2020, and the third worst month since 2010.
Sector wise performance broadly went hand in hand with data point publications where decline in sales of Cements (-30% MoM), Autos (-17% MoM) took the respective sectors among the worst performing sectors. On the other hand, with higher POL sales (+21% MoM), OMCs were outperformers this month, albeit closing at negative returns.
Fiscal adjustments begin this month
Along with ongoing monetary adjustments, the much-needed fiscal adjustments began the month. The Policy Rate was further hiked by 150 bp taking it to 13.75%. With that, rates on Export Finance Schemes and Long-Term Financing Facilities were also increased by 200 bp and linked to the increasing Policy Rate trajectory in order to enable better policy transmission. Brakes on the escalating yields were put followed this announcement.
The government also announced a ban on selective import items to arrest the mounting import bill as CAD for FY22E is already estimated to touch US$16bn.
Unwinding of subsidy on fuel products finally began, starting with a hike of Rs30/ltr. With more rounds of fuel price increase anticipated from IMF’s recent statement, recent news flows also suggest reversal of electricity price subsidy in the coming weeks. Though the impact of these developments would take a toll on inflation readings, we believe much of this has been priced in by market participants. Albeit, these steps remain crucial for the macro policy directions of the country and securing the 7th IMF tranche, which would reportedly be followed by inflows of US$8-9bn from other multilateral and bilateral sources.
Will KSE100 catch the ‘budget fever’ this year?
A strong relation of market multiples observed with import cover gives us hope for the potential external inflows to revive confidence of market participants.
With the Federal Budget FY23 scheduled to be announced on 10th June, further clarity on macro policies is expected. Struggle on improving tax collection may bring sectors such as Banks, Steel and Edible Oil under higher taxes, while some adjustments on development expenditures (unfavourable for construction and allied sectors) should also be expected.
As some steps to address macro headwinds have been taken by the policy makers, we believe revival of confidence will come to play sooner, than later. Barring the year of lock-down, though the month of June has reported negative returns consistently since CY17 and six out of the last nine years. The current valuations of Pakistan market at sub 5x PE may however invite bottom-fishing this time.
Our liking for banks, E and Ps and fertilizer is intact where combination of growth stories with dividend yields are on offer. Event-based themes in the E and P and OMC sectors, related to resolution of circular debt, should also be kept on radar.