Elixir Securities Limited – Pakistan Equity Market: Weekly Review

Karachi, December 07, 2018 (PPI-OT): Index Plunges 4.8% on Monetary Tightening and Dismal Offtake Numbers

KSE100 Index fell 4.8%WoW (1,934pts) to close at 38,562 mainly due to higher than expected monetary tightening (150bps interest rate hike), global markets sell-off, fears of redemptions from Mutual Funds and dismal offtake numbers for Cement, Automobile and Oil Marketing Sectors.

Market activity remained dull during the week with average traded value declining by 18%WoW to USD53mn in spite of 7%WoW higher average daily traded volumes, reflecting concentration of activity in penny stocks.

On economic front, CPI inflation clocked in at 6.5%YoY in Dec-18 much lower than our forecast of 7.4%YoY owing to lower than expected Food inflation (actual -0.6%MoM vs. expected 0.8%MoM) and flat Communication inflation (actual 0.1%MoM vs. expected 17.3%MoM) in spite of 18% jump in local telephone call rates as its weight is rather insignificant in comparison to our prior expectations. Similarly core Non Food Non Energy (NFNE) inflation clocked in at 8.3%YoY compared with our expectation of 8.8%YoY. Nonetheless we maintain our inflation and interest rate projections as we expect it to continue to increase at a faster pace in upcoming months due to PKR/USD depreciation.

During the week State Bank’s foreign exchange reserves further slipped by USD560mn to USD7.5bn owing to persistently high Current Account Deficit and external debt servicing in the absence of meaningful financial flows.

Cement stocks were down 5.6%WoW due to 14.0%MoM/1.1%YoY decline in dispatches in Nov-18 where local offtake has remained particularly dismal falling 14.9%MoM/7.1%YoY in Nov-18 and 0.5%YoY during 5MFY19. After remaining depressed for the most part of the week, Cement stocks nonetheless recovered on Friday owing to news regarding beginning of construction work on Diamer-Bhasha and Mohmand Dams from Jun-19 and Mar-19, respectively.

Oil Marketing Companies (OMCs) fell 10.2%WoW owing to 19%MoM/32%YoY decline in industry sales in Nov-18 on curtailment in FO based power production and fall in retail fuel sales. FO decline has exceeded our expectations where it has fallen 68%YoY (vs. our expectation of 44%YoY for FY19). Moreover, 2%/21%YoY decline in MS/HSD during 5MFY19 (vs. our expectation of 7.0%/5.9%YoY growth for FY19) was also surprising.

E and Ps sector was down 4.8%WoW due to uncertainty over production cuts by OPEC in its ongoing meetings.

Foreign selling subdued during the week standing at USD2.5mn compared with USD51.1mn in previous week (owing to MSCI rebalancing). On domestic front, mutual funds remained the biggest net seller during the week disposing USD31.1mn likely due to redemptions and shift in investments from equity to fixed income funds amidst higher fixed income yields and risk-off sentiment. Most of this selling was absorbed by Insurance companies and Individuals with net buying of USD18.9mn and USD12.1mn, respectively.

Key news this week

Monetary policy: SBP hikes key interest rate by 150 basis points to 10% (Economy) – Neutral

Cement sales show negative growth in Nov (Cements) – Negative

Oil sales fall (OMCs) – Negative

Government allows furnace oil export (Power) – Positive

SBP reserves down 7pc (Economy) – Negative

This week’s top stories

Lucky Cement Limited – Consolidating the Conglomerate (Short Report)

Equity Market Outlook and Perspective

We expect risk-off sentiment to remain at forefront due to economic slowdown and uncertainty over foreign financial flows. E and P is expected to remain in limelight owing to OPEC’s agreement to cut 1.2mnbpd oil supply which has caused prices to prop up by USD2.5-3/bbl (4-5%) today (with most of these gains clocking in after equity market closed in Pakistan).