The change of guard on the political front led to an initial relief rally at PSX (up 3.7% for the month at one point), as this was expected to bring back much needed attention and ownership of macro policies which had been missing in last few weeks, amidst the political noise.

The initial relief rally at PSX however faced hiccups as political noise failed to die down while macro policies also remained unclear, resulting in the KSE-100 closing +0.7% MoM in April-22, taking 4MCY22 performance to +1.5%. April however, witnessed better participation with higher average volumes in earlier sessions taking the average trading to 40% MoM.

… as clarity needed on policy matters

With PML-N now taking charge of the lower legislative house of Pakistan, the current government needs to show resolve and provide the market clarity on critical policy matters. Just before the government changed hands, the State Bank of Pakistan (SBP) raised Policy Rate from 9.75% to 12.25% (+250 bp), and had termed it ‘decisive’ to curb expectations of further hikes.

The policy impasse has however meant that secondary market yields have continued to rise with KIBOR approaching 15% level in the last days of Apr-2022.

Immediate action needed on fiscal front…

The key fiscal challenge is rolling back subsidy on retail fuel prices announced by the outgoing government.

While new government has stressed the need to remove these subsidies in a targeted manner, political compulsion and festive season constrained them from making a move as yet, resulting a subsidy of ~PKR30/litre on petrol vs an earlier commitment to IMF to collect PKR30/litre levy on the same. Swift action on the fiscal side is needed to keep rates and under control and also unlock respite on external front

… which might pave way for external respite via IMF

Last month’s Balance of Payments took a huge toll on SBP’s forex reserves, reducing by US$4bn to a 2-year low level to US$12bn over CAD of US$1bn and delay in debt rollover from China. The depletion continued in Apr-2022 as SBP reserves reach US$10.6bn, taking a toll on PKR movement against the US$ declining to its all-time low at Rs188.

The pressure can extend in coming months with recent Indonesian ban on palm oil exports and reported US$4bn additional scheduled payments by SBP in coming months. Resumption of talks with IMF on their next visit to Pakistan in May-2022 has been welcomed with prospective extension of the program to Jun-2023 and enhancing it from US$6bn to US$8bn.

In addition, friendly countries i.e. Saudi and UAE could also respond positively to the IMF program coming back on track. Sorting out the fiscal situation appears to be the first milestone to that end.

Corporate results reflect some stress

The result season for Mar-2022 quarter kicked off with improving results in the banking and OMC sectors, albeit flat/declining margin in the cement and steel sector. Sectors continue to feel the brunt of inflation and higher commodity prices as price increase announcements were witnessed in the Steel, Fertilizer and Autos. To recall, price increases in these sectors were also reported in Mar-2022, in addition to Cement price increase.

Outlook

Though the fresh Cabinet formation is somewhat similar to the previous tenure of PML-N (2013-2018), the ongoing stress on key economic dials suggest the upcoming Budget should not necessarily be similar to PML-N’s previous pro-growth Budgets. The market would be able to grasp a clearer picture of the incumbent government’s economic policies in the Federal Budget FY23, which is reportedly to be announced in the first week of Jun-2022.

We believe valuations of Pakistan market at sub 5x PE would to unlock as attention to corrective economic measures surface and begin to implement, making cyclical rebound off the lows a matter of when and not if. We reiterate our liking for Banks, E&Ps and fertilizer where a combination of growth stories with dividend yields are on offer.