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AKD STOCK SMART, Mar 06, 2020

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Weekly Review                                

The market started the week on a positive note, following encouraging developments on:  i) macro front - soft Feb’20 inflation of 12.4% vs. street consensus of 13.30% and promising trade numbers (trade deficit fell by 19.7%YoY and 15.8%MoM) and ii) geopolitical front – US formally striking peace deal with the Taliban. The KSE-100 index gained 1,312pts (+3.46%) in the first trading session. However, the market was quick to reverse the early gains losing 389pts (-0.99%) in the next two trading sessions following the international markets. The mid-week Fed’s emergency rate cut and consequent reduction in bond yields once again raised the easing expectation amongst market participants, which led to another brief rally of 475pts (+1.2%) in the fourth trading session. The market however once again couldn’t sustain the momentum and lost massive 1,162pts (-2.9%) in the last trading session of the week. Overall, the KSE-100 index closed 0.62% higher at 38,220pts. Sector-wise, cyclicals were the major outperformers, with the Cement sector leading the pack. The sector rallied 12.5%WoW on solid volumetric offtake and early easing expectations while Steel, Chemicals, and Cable & Electrical Goods were other notable outperformers, gaining 9.9%WoW, 7.6%WoW, and 7.4%WoW, respectively. On the flip side, Commercial banks lost 3.8% of their market capitalization, as the investors started pricing the early interest rate cut. Key news flows impacting the market during the week were i) The US has formally signed historic deal with the Taliban, laying out a timetable for a full troop withdrawal from Afghanistan within 14 months as it seeks an exit from its longest-ever war, ii) Latest reported numbers showed 16.35%YoY growth in FBR’s tax revenue collection for 8MFY20 to PkR2.72trn while revenue shortfall widened to PkR484bn, iii) The gov’t has reduced the POL product prices by PKR5 per liter for the month of Mar’20, partially passing on the impact of declining oil prices, iv) Foreign portfolio investors (FPI) made the first notable withdrawal from rupee based government debt securities, with cumulative outflows reaching US$488mn and v) Fauji Fertilizer Company (FFC) - which accounts for ~40% of total country’s urea offtake - reduced its urea price by another PkR75 per bag to PkR1665 per bag.

 

Outlook

Monetary policy announcement will be the most-watched event next week, impacting the market performance. The street expectations are tilted towards rate cut following soft inflation reading in Feb’19 and the Fed’s emergency rate cut. We, however, expect the SBP to err on side of caution and opt for ‘status quo’, as the expected deceleration in inflation is primarily due to high base effect, delay in utility rate adjustments and price normalization in certain food categories rather than genuine price declines across the basket. Besides, the market will continue to track global developments pertaining to COVID-19, particularly the policy response from other countries’ central banks and the OPEC.

AKD Research