Karachi, November 01, 2018 (PPI-OT): A tale of two halves
It was a rollercoaster ride in Oct-2018 as the market corrected by 11% during the first half of the month, before spurring into action, recovering by 14% in the second half (KSE-100 index up 1.6% MoM overall).
Cyclical sectors outperformed in the latter half of the month, depicting volatility as they had also shown some of the highest negative returns in the initial half. Banks and E and Ps maintained their status of safe bets in volatile circumstances.
A key trigger could be the PM’s upcoming visit to China, where news flows suggest potential developments pertaining to (1) Balance of payments (BoP) support, (2) preferential export tariffs and (3) PM’s Housing program.
It remains to be seen how the government balances the delicate tradeoff between stabilization and a pro-growth strategy. In this backdrop, we continue to like Banks and E and Ps, while there is still some space in Cements following recent sharp correction.
We highlight here that if the PM housing scheme materializes, it could provide impetus to valuations for related sectors, such as Cements and Steels (rebars).
A tale of two halves in October
It was a tale of two halves as far as market performance is concerned for the month of October. Although in totality, the KSE-100 ended up by a meager 1.6% MoM for Oct-2018, prior to this, the index plummeted 11% to a closing low of 36,663 by October 16, before steamrolling through the latter half, returning 14%. Volumes told a similar story, averaging 150mn in the first half, before surging to 293mn in the second. In terms of sector-wise performance, Banks and E and P’s, churned out sub- par returns during the second half rally, as they had also corrected by a smaller percentage in the first half, confirming their ‘safe bets’ status.
Cyclical sectors such as Cements, Steel and Autos showed extreme volatility, exhibiting high returns in 2H, to recover from the bruising in the earlier half. In terms of flows, foreigners remained Net Sellers throughout the month – in bullish and bearish scenarios alike –with net selling of US$83mn, while total net selling since the post-election high (July 30) amounted to US$173mn. It will be interesting to view international investors’ sentiments leading up to, and immediately after the upcoming MSCI review on November 13.
External financing news dominated market sentiment
Following a dose of oxygen for the economy by way of US$6bn from Saudi Arabia, although the next stop for the PM is Beijing, the possibility of an IMF revisit cannot be altogether ruled out. It should be noted that earlier ‘experts’ were claiming that an IMF program would be positive from the market’s viewpoint; however, when the Finance Minister finally broke the news of IMF meetings, the market reacted quite negatively to this development. That said, an IMF program would not be a bad thing altogether – particularly with the increased leverage of Saudi and possible Chinese funds – as it would help build some more fiscal discipline.
What is left to be desired is financial autonomy – why does Pakistan need the IMF every time and why can’t it bring fiscal reforms on its own accord without involving IMF or any other lender? The IMF equation notwithstanding, we believe that meaningful news could emanate from across the Chinese border; and what China can offer to its long-term ally and financially challenged strategic partner. What is interesting to know is that while Pakistan availed ~US$6bn from IMF in the latest program, we have already received double that from China (~US$12bn) during the same period. If recent news flows are taken into account, positive developments can be expected in (1) balance of payments support, (2) preferential export tariffs, and (3) support in the PM’s housing program.
Watch out for key triggers in coming days
On the global front, we believe it will be crucial to observe oil prices in light of US sanctions on Iran. Other noteworthy news include (1) upcoming US midterm elections, and (2) the US Fed meeting in early November. Local news will be dominated by aforementioned China and IMF meetings (both in early November), and the SBP’s monetary policy towards the end of November. It will be interesting to see if the central bank continues its current cycle of interest rate hikes, given surging inflation and a downward spiraling local currency. CPI for Oct-2018 could clock in at ~5.4% YoY / 1.0% MoM given (1) upcoming quarterly house rent adjustment, (2) rise in food inflation, (3) increasing gas and CNG prices, and (4) surging SBP borrowings.
Moreover, given the lagged impact of the devalued PKR, coupled with yesterday’s decision to increase petrol prices, inflation readings going forward could continue to remain upwards bound. We repeat for the umpteenth time that key challenges for the government are those of a longer term nature and pertain to institutional reforms and these will eventually decide the fate of the country, its economy and capital markets. It remains to be seen how the government balances the delicate tradeoff between stabilization and a pro-growth strategy. In this backdrop, we continue to like Banks and E and Ps, while there is still some space in Cements following recent sharp correction. We highlight here that if the PM housing scheme materializes, it could provide impetus to valuations for related sectors, such as Cements and Steels (rebars).