JS Securities Limited – Morning Briefing

Karachi, March 15, 2019 (PPI-OT): Market remains dull due to economic challenges and no triggers

Average Daily Traded Value (ADTO) has declined significantly this year as it stands at US$25mn over the previous five trading sessions.

Insurance companies and Individuals contributed 87% to net buying in CY18, whereas their participation has been lower this year. Mutual funds were net sellers last year, and during YTD CY19.

Amid challenges such as FATF review, lack of clarity on IMF program, uncertain monetary policy outlook and fiscal concerns, no sustainable rally in the market has been evident in recent times.

Quick recap of recent events dulling market performance

Predicting market direction, given the current situation, would probably not yield any conclusive results. The market seems to be stuck in limbo, awaiting anxiously any fresh triggers; however, nothing substantial has emerged or appears to be on the cards. We review the current situation in the following points:

One obvious indication of the market’s predicament is average daily value traded (ADTO), which currently stands at US$43mn during YTD CY19, down by 34% YoY, whereas ADTO during Mar-19 so far paints an even more dismal picture, at US$32mn. Moreover, during the past five trading sessions ADTO has shrunk to US$25mn!

At least there is some improvement on the foreigners’ front, as there has been net buying activity in YTD CY19 of US$25mn, compared to net selling of US$537mn in CY18. During CY18, selling by foreigners was absorbed by Insurance Companies and Individuals, with net buying of US$313mn and US$153mn, respectively, cumulatively contributing 87% of net buying by locals. During YTD CY19, both these segments have remained muted by comparison.

In case of insurance companies, their activity (or lack, thereof) is so far in line with our earlier observations as we had predicted that rising interest rates could compel proportionately higher allocations towards fixed income markets. For individuals, we believe the key issue for the lack of interest could have more to do with them being already invested in the market, leaving less room for fresh buying. Mutual funds were the major net sellers in YTD CY19, with net selling of US$32mn.

One sigh of relief from the market’s perspective is cooling emotions at both sides of the Indo-Pak border. At one point, it appeared that the aftermath of the Pulwama incident could prove catastrophic for both countries; however, tensions seem to have subsided significantly and recently, talks were held on finalizing the modalities of the Kartarpur Corridor, with further talks expected in April. That said, more steps need to be taken to ensure that the situation reverts to a normalized, and perhaps, even cordial relationship between neighbours.

Although earlier, regarding the FATF review, the narrative suggested that things were moving according to plan; media reports show that Pakistan needs to take more measures to meet FATF requirements. While there has been talk in the past of the government’s resolve to move forward on the National Action Plan, possibly there was room for more actions to be taken. It remains to be seen how seriously the incumbent government implements the National Action Plan, which would be essential in meeting FATF requirements.

The market anxiously awaits news regarding entry in an IMF program; yet the perplexing situation is that the market appears uncertain whether IMF would be good or bad news! Nothing substantial pertaining to IMF is expected this month. Moreover, there have been media reports quoting the Finance Minister that the US$3bn deferred oil payments facility from the UAE might not materialize (however, alternative financing arrangements have been made). Amid challenges such as FATF review, lack of clarity on IMF program, uncertain monetary policy outlook and fiscal concerns, no sustainable rally in the market has been evident in recent times.

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