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Pakistan Market: 2018 Sectors Performance

• Benchmark index has lost 5.3% during 2018TD in rupee terms (25% in US$ value) with 4 sessions remaining. Engineering sector was the worst performing sector (-39% YTD), specifically on the back of poor performance by steel sector owing to slowdown in economy and dumping of steel products from other countries.
• Tobacco and Chemicals were among top performers with return of 22% and 14% respectively, where former remained in limelight due to continuation of lower slab of cigarettes, thus enhancing  manufacturers sales and latter performed better due to favorable international dynamics, resulting in higher gross margins.
• Automobile sector was the second worst performer as non-tax filers were barred to purchase new vehicle, affecting sales of automobile assemblers. To note, auto sales during 11M2018 were down 7% YoY. Further, rupee devaluation of 24% since Dec 2017 has also affected gross margins of auto assemblers.
• Rupee devaluation of 24% since Dec 2017 has left significant impact on sectors which use imported raw materials in their manufacturing process or are heavily exposed to foreign exchange. Market cap of Automobile, OMCs, Refineries, Pharma and Engineering sector trimmed by 9-39% as all sectors incurred exchange losses and select sectors faced decline in gross margins amidst their high imported raw material costs.
• Heavy weight sectors of index, namely Banks and E&Ps representing 25% and 14% weight in KSE100 index respectively, shed 3% and 15% in their market caps, respectively. Banks yielded -3% YTD despite increase of 425bps in policy rate. We attribute negative performance of banking sector to higher compliance and admin related costs which hammered Sector’s profitability. Further, impact of hike in policy rate is not yet fully reflected in 9M2018 numbers.
• Moreover, E&Ps underperformed benchmark index by 10% as international oil prices (WTI) is down 29% YTD. Arab Light (Pakistan E&Ps benchmark) is down 17% YTD. Textile sector returned 11% to investors’ during 2018TD and outperformed market by 16% due to rupee devaluation and Govt’s focus towards reviving exports

Outlook in 2019:

• For 2019, we are ‘Overweight’ on Banks, E&Ps, and Textile. Banks will benefit from higher interest rates, and lower onetime expenses, which existed in 2018 like 1) pension provision, 2) cost to close foreign operations, and 3) impairment of investments.
• E&P sector is likely to outperform in 2019 due to its attractive valuation and rupee devaluation of 24%. However, if international oil prices remain under pressure, then sector’s profitability may face headwinds. Similarly, outlook of textile sector also looks favorable for next year as the new govt. is aggressively working to enhance exports by providing incentives to 5 export oriented sectors including textile.