Karachi, December 01, 2022 (PPI-OT): Nov-2022: Dire need of progress on IMF
Uncertainty limits Nov-2022 gains to 2.6%
Nov-2022 started with bulls in charge, taking KSE100 Index up by more than 4% into only the second week of the month. Positive sentiments were backed by hopes on improving foreign exchange reserve position after news flows suggested investments and debt rollovers being agreed by some friendly countries.
The momentum was however short-lived as uncertainty on progress with IMF on Pakistan’s 9th review and heated political environment brought back the bears. This was further piled on by the surprise 100bp increase announcement in Policy Rate, resuming monetary tightening cycle. As a result, KSE100 Index gains limited to 2.6% this month. This nevertheless trimmed some of the year’s losses with 11MCY22 losses reducing to 5%.
Volumes also depicted a similar picture where investors opted to refrain from activity. As a result, volumes declined by 26% MoM and traded value decreased by 21% this month. Foreign investors turned net buyers, dominating in the Exploration and Production (E and P) sector.
Concerns on external position rise
Foreign exchange reserves position was among the key talking points this month. After an inflow of US$1.5bn from Asian Development Bank (ADB) last month, debt repayments in Nov-2022 wiped away SBP’s FX reserves by a similar quantum. Moreover, heading towards relaxation of opening Letter of Credits and declining remittances trend also raised concerns over further pressure on SBP FX reserves.
The lingering IMF review over unclarity on fiscal impact by the flash floods from government’s end has been another key factor of dull sentiments. With the recent monetary tightening resumption, the market feeler is a strict conduct from the Fund’s end with not much space for any relaxation and / or slippages regarding its guidelines and targets. So far, Pakistan has missed some IMF targets in the 1QFY23 fiscal account, which does not bode well for discussions in the ongoing review.
Defensive picks recommended till clarity prevails
We believe progress on Pakistan’s 9th review with IMF, expected by month-end, would boost investor confidence. On the other hand, key appointments that remained in news in the run up to actual appointments at month end has shot down speculations. Moreover, declining trend in global oil prices (-12% MoM) is another trigger to positive sentiments over expectations of offsetting normalized import bill in the months to come. We believe these factors give room for some rally.
Albeit, till noise at the political arena does not subside, we recommend defensive picks that are offering annual D/Y of 13% – 20%. Our picks include UBL, BAFL, POL, MCB, FFC and MARI.