Karachi, September 01, 2022 (PPI-OT): Monthly Wrap: Best August in 10 years

KSE100 index among best performers this month

Progress on IMF’s 7th and 8th review provided much-needed fuel that Pak equities had been awaiting. Benchmark KSE-100 index pared some of the gains (i.e. up 9% MoM at one stage) towards the latter half due to floods and political noise and rounded off Aug-22 at +5% MoM, still ending up as the best August for KSE-100 in 10 years. The positivity also reflected in ~17ppt decline in Pak int’l bonds yields maturing in 2022/24 and 9% PKR appreciation against US$ (+11% at one stage).

PKR appreciation translated PSX’s US$-based gains to 16% MoM, rendering PSX amongst best performing markets in Aug-22. FIPI data suggests foreign investors continued to be sellers, which was somewhat accelerated in banking space. While results of the sector remained robust, we believe announcement of exclusion of Bank Alfalah (BAFL) and National Bank (NBP) from FTSE All Cap Index might have played a role in the accelerated selling in banks.

IMF makes way for external support

Pakistan receiving the final nod to disburse US$1.2bn from IMF, and with an extension on the program, makes way for external support from friendly countries. Though the approval did not come as a surprise given Pakistan had already met all substantial prior conditions – monetary tightening, energy tariff increase, higher taxes in Federal Budget FY23 etc., we highlight sticking to these conditions would carry a lot of weight for the market to unlock valuations.

Magnitude of loss from floods a key risk

While concerns over higher inflation and use of monetary tightening remains among IMF’s other recommendations, State Bank of Pakistan (SBP) opted to keep the Policy Rate unchanged this month at 15% citing moderation in domestic demand and lower import bill witnessed in Jul-2022.

Trend of decline in demand is now prone to converting into a negative supply shock, owing to the ongoing floods that may lead to food security concerns with higher than estimated inflation readings.

To recall, current FY23 inflation estimates are already close to 20%, while recalling Floods 2010 indicate a sharp food inflation increase. Any indication of resumption in monetary tightening may continue to contain any re-rating from existing 3.7x market multiples.

Outlook remains intact

While the developing situation regarding floods and uncertainties attached to it take us a step back for near term gains, we reiterate equity markets offer attractive upside across the bourse in the longer term.

We prefer Banks in the high interest rate scenario, where KIBOR has crossed its 2008 high and reached 16%, with UBL, BAFL and MEBL among our top picks. PKR depreciation and higher oil prices also keep OGDC and MARI among our favourites, where any developments to resolve the outstanding circular debt issue should bode well for the entire energy chain.