Maneuvering Through a Trade War, New Government, and an IMF Program
There are three over-arching themes that will affect macros in the remainder of 2018: the trade war, new government, and possible entrance into a new IMF programme. The three together will affect all parts of Pakistan’s economy, in both positive and negative ways. We expect a rally post-elections, and are targeting an Index level of 44,000 to 45,000 by Dec’18. Given our outlook on the economy, we recommend investors to be market weight on most sectors, over-weight in Banks, and underweight on Autos and Power. Our top picks for the remainder of the year include HBL, UBL, ASTL, MUGHAL, ACPL and FATIMA.
Trade War to Benefit Inflation and Harm Exports
The trade war between USA and China stands to hurt Pakistan’s exports because of its effect on the value-chain of Chinese products and also because of its negative effect on China’s GDP. Nevertheless, we expect Pakistan’s exports to rise by around 10% in FY19 due to other factors, like greater energy availability and PKR devaluation, that we expect will undermine the effect of the trade war. The war will also affect inflation as international crude oil prices are likely to start declining once the impact on China’s economy becomes apparent.
New Government to Clear Away Uncertainty
We expect a PTI led coalition to form the next government, which will help clear the uncertainty that has currently gripped the market. As a result of a smooth transition to a new Government, which will help pave the way to approach the IMF and sort out the external position, we expect the market to rally post elections. We expect the KSE-100 Index to approach the level of 44,000 to 45,000 by December 2018 end.
IMF to Finally Improve the External Position, Affect Monetary Policy
We expect one of the first things for the new Government to do is to approach the IMF for a new programme. Given that the last programme was successfully completed, which helped build trust, and given that IMF has just recently approved a big USD 50bn bail-out package for Argentina, there are chances that this time around Pakistan will get a bigger programme. This will help the depleting foreign exchange reserves position of the country. Also, we expect a further 50bps hike in monetary policy rate in late 2018 or early 2019 as SBP will want to show IMF that it is doing its utmost to manage the balance of payments.
Expecting Further Drift in PKR, Uptrend in Inflation and Rate Hike
Partly due to the above factors, we expect PKR to devalue to PKR 130/USD by September 2018 by which time the new Government should be able to get a new IMF programme approved. Further, we expect inflation to peak in 1QCY19. We also expect another 50bps rate hike in either late 2018 or early 2019. However, we expect the rate hike to be reversed later in 2019 as inflation starts trending down, mostly on the back of declining oil prices.
Top Picks Include Banks, Steel Manufacturers and Cements
We advise investors to over-weight their portfolios on the Banking sector because of the recent interest rate hikes. Our top picks within this sector are HBL and UBL. On the other hand, we advise investors to under-weight Autos because of PKR devaluation and upcoming entrants, and to under-weight Power because of the hike in interest rates. For the rest of the sectors we recommend to market-weight.
Amreli Steels Limited is a Pakistan-based steel manufacturing company. The Company is engaged in the manufacture and sale of steel bars and billets. The Company offers a range of steel bars for all construction needs.
Attock Cement Pakistan Ltd. Attock Cement Pakistan Limited is principally engaged in manufacturing and sale of cement. The Company is also engaged in exporting clinker and cement both in bags and bulk to the United Arab Emirates (UAE), South Africa, Iraq, Sri Lanka and many other countries. The Company also has the facility of supply of cement in bulk and also produces the low alkali cement for some of its market. Its products include Ordinary Portland Cement (OPC), which is a product under the Falcon Brand used in all types of general construction. OPC can be used in concretes, mortars, grouts and premix concrete. It also offers Sulfate Resistant Cement (SRC), which is sold under falcon Brand and is used in sea and coastal areas and provides resistance to chemical attack from sulfates and dissolved salts present in sea and saline waters. The Company's Falcon Block Cement product is offered for block and precast slab makers.
Co. is engaged in the production and sale of Ordinary Portland and Sulphate Resistant Cements.
Fatima Fertilizer Company Limited is a Pakistan-based fertilizer manufacturing company. The Company is engaged in manufacturing and marketing of Nitrogen, Phosphate and Potash fertilizers. It produces a range of fertilizers, including Sarsabz Calcium Ammonium Nitrate (CAN), Sarsabz Nitro Phosphate (NP), Nitrogen Phosphorous Potassium (NPK) and Sarsabz Urea. Its CAN is a granulated nitrogenous fertilizer. Sarsabz Urea can be applied in various forms and it can be spread in bulk alone or can also be mixed with other fertilizers before application. Its NP can be applied on various types of soils. The Company has a production base for Nitric Acid. The Company has annual production capacity of Urea 500,000, CAN 420,000, NP 244,000, Nitric Acid 500,000 and Ammonia 500,000. It also offers services and support to farmers from education on farming practices and research oriented agricultural practices.
Fauji Fertilizer Bin Qasim Limited is a Pakistan-based holding company. The Company manufactures, purchases and markets fertilizers. It is involved in meat, dairy and coal based energy generation sectors. It has identified its potential business segments and has undertaken investments in the areas of food, financial, power sector and wind energy projects. Its products include Granular Urea, such as Sona Urea, and Di Ammonium Phosphate (DAP), such as Sona DAP. Sona Urea is a synthetic organic compound containing nitrogen in amide form available in the form of white solid prills. It is applied to soil and also suitable in solution form as spray application. Sona DAP contains nutrient element, phosphorous besides nitrogen available in flowing granular form Granules are stronger, harder and of uniform size. It is suitable for various crops and soils recommended for initial application. It produces over 791,260 metric tons (MT) of DAP and approximately 433,610 MT of Urea.
Habib Bank Limited is engaged in commercial banking and asset management related services in Pakistan and overseas. The Bank's segments include Branch Banking, which consists of loans, deposits and other banking services to agriculture, consumer, small and medium-sized enterprise (SME), and commercial customers; Corporate Banking, which consists of lending for project finance, trade finance and working capital to corporate customers and it also provides investment banking services, including services provided in connection with mergers and acquisitions; Treasury, which consists of trading, fixed income, equity, derivatives and foreign exchange businesses, and it also includes credit, lending and funding activities with professional market counterparties; International Banking, which is engaged in monitoring and reporting purposes and consists of its operations outside of Pakistan, and Head Office/Others. It operates in Pakistan; Europe, Middle East and America, and Asia and Africa.
Mughal Iron & Steel Industries Ltd. Mughal Iron & Steel Industries Limited is engaged in manufacturing and trading of mild steel products. The Company is engaged in producing steel in the long-rolled steel products, which has a capacity of 688,000 metric/tons of re-rolled steel per annum. The Company is engaged in multidimensional activities from making billets of mild steel, spring steel, deformed bar, re-bar, cold twisted rebar and a range of sections, such as I-beams, L-sections, C-section, H-beams and T-bar. The Company offers its products under various categories, including Smelting, such as Ferro Silicomanganese, Ferro Chrome and Ferro Silicon; Billet, such as Mild Carbon Billets, Spring Steels, Austentic Stainless Steel, Ferrite Stainless steels and Alloys Steels; Bars, including Deformed Bars, Re-inforcement Bars and Thermax Bars; Beams, including I Beams (Girders), Angle Section (L Section), T Bar (T section) and C Channel, and Grade and Specifications, including ASTM A 615 G-40 and ASTM A 321.
United Bank is engaged in commercial banking and related services. Co. operates five business segments: Corporate Finance, Trading and Sales, Retail Banking, Commercial Banking and Asset Management. As of Dec 31 2016, Co. operates 1,341 branches inside Pakistan including 47 Islamic Banking branches and 2 branches in Export Processing Zones, and 18 branches outside Pakistan.
Ismail Iqbal Securities (Private) Limited (IISPL) is a TREC holder of the Pakistan Stock Exchange, as well as an SECP registered Underwriter and Book Runner. IISPL provides comprehensive financial services including Equity Sales, Research on Equities and the Macro-Economy, Investment Advisory, Portfolio Management, Corporate Finance, and extensive services for Private Equity investors. IISPL services a diversified client base, from Institutional to Retail Investors including High Net worth Individuals.
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