EUR 8.55 For Business Accounts Only

Pakistan Strategy_July’19 Review_Gunpowder gone dry

• Marking its sixth consecutive month in the red, the KSE-100/All Index fell 6.1/7.5%MoM, taking cumulative 7MCY19 decline to 13.8/17.6%, with investor participation dipping 38/43%MoM, respectively.
• Despite the IMF Board’s approval of the US$6bn EFF package, and disbursement of the first tranche, investors switched their focus to accompanying terms, particularly harsh fiscal adjustments requisite under the program, while mounting inflationary pressures (somewhat pre-empted by hastened MPC decision of an additional 100bps rise in the DR) set the road to monetary consolidation.
• The ‘flight to safety’ trade gained ground, with greater portion of traded share activity made up of KSE-100 stocks (80.5%) than the average CYTD (~71.1%) as investor sought refuge in cheap valuations, while catalysts on the horizon (PkR200bn Energy Sukuk, new tax claims mechanism for industry) remained few and far in between to spur sizeable buying interest.
• Accelerated FPI inflows (US$30.4mn) balanced rampant selling from Mutual Funds (US$44.3mn) where repositioning by unit holders to take advantage of rising short term yields, and apathy from other investor classes subdued flows. Foreign buying interest was seen in Cements (US$13.1mn inflow), Commercial Banks (US$12.4mn) and Power Gen. (US$6.9mn).
• After undergoing steep declines, attractive valuations are hard to refute, with mainboard stocks looking cheap at present levels (FY20 P/E of 5.88x), with Banks and E&Ps remaining drivers of counter-cyclical growth. Materiality of macro measures and their desired impacts (particularly monetary policy) is unlikely to materialize before 4QCY19, making the current quarter a particularly volatile one. Re-iterating a long term horizon, MEBL, HBL, OGDC, NML, HUBC, EFERT are blue-chips to buy.