Karachi, May 02, 2023 (PPI-OT): Apr-23: Bulls return; more upside possible
KSE100 monthly return marks 8-month high at 4%
After consistent dull sessions, some positive development on the political front and better than expected corporate profitability brought the bulls back this month, taking the KSE100 index up 3.9%. Better profitability led to stock performance in the heavy-weights Banking (+5.6% MoM) and Oil and Gas Exploration (+3.7%). The benchmark performance was highest in 8 months. This also brought the calendar year's returns so far to the green zone as 4MCY23 returns turned to a gain of 2.9%. While stable PKR/US$ also replicating a similar return in US$ terms during Apr-2023, the cumulative US$-based returns for 4MCY23 clocked in at -18%.
The same excitement was however not witnessed in investor participation as lower trading hours for the month of Ramadan took average daily volumes down 28% MoM. While foreign participants marked the second consecutive month of net selling, Banks and Companies segments remain among net buyers.
Macro challenges continue
Macro challenges continue as record high inflation, with more to come, pushed the central bank to continue with monetary tightening this month. The State Bank of Pakistan (SBP) announced another 100bp hike, taking Policy Rate up to 21%.
On the other hand, while Current account balance for Mar-2023 clocked in at a surplus of US$654mn, the positive balance was not rejoiced. This was an 8-year high monthly balance and the third highest monthly balance witnessed in the last 20 years, albeit led by lower / restricted imports. The same, also continued to impede economic growth as latest LSM data shows a reduction of 5.6% YoY during 8MFY23.
With SBP foreign exchange reserves increasing for the fourth consecutive month, the country buys more time till IMF talks conclude, following fresh foreign exchange inflows to the country from various lenders. Albeit, reserve levels remain at critical levels, where even with reduced imports, import cover stands at five weeks.
More clarity to lead to more gains
As news reports suggest guarantees from Saudi Arabia and UAE being met, all other efforts are also being made to reach to concluding the prolonged IMF talks. The government consistently reiterates expectation of the Staff Level Agreement (SLA) to be signed soon. On the other hand, the recent four-day visit to China by COAS Gen Asim Munir was also important.
While these developments are yet to be priced in the market, we highlight current levels as buying opportunity with KSE100 P/E still at 3x. We recommend Banking, E and P, and Fertilizer sector for higher D/Ys and decent capital upside, as recent results reaffirm our view. We highlight UBL, BAFL, MEBL, HMB, BAHL, MARI, POL and OGDC from the said sectors. We also prefer the Cement sector with MLCF, PIOC and KOHC among picks. Moreover, we also recommend Pharma sector amid talks on drug price increase, where we reiterate AGP among top picks.