The KSE-100 Index remained lukewarm, gaining only 92 points (+0.8% WoW) as potential positives on the macro as well as industrial front were over shadowed by domestic political uncertainty and global economic concerns. Activity was sporadic with average daily volumes clocking in at 75.5mln shares (-9.35 WoW) with interest seen in specific stock plays only. Banking institutions were the major players in the market, whereas foreign investors continued their selling trend with a net USD 2.7mln divestment during the week. In the T-Bill auction held on Monday, the 3M cut-off yields came at 12.74% – 76 basis points below the discount rate. This is a rare instance, implying market expectations of an imminent rate cut. Moreover, the 10-year bond yield at 12.66% is below shorter term yields, implying the presence of an inverter yield curve which signals expectations of lower policy rates in the medium to long term. These expectations are given rise to by encouraging macro-economic figures released by the SBP till end-Sept11. Prominent in those is the reduction seen in inflation rate which has reduced down to 10.46% in Sept – a 110bps decline MoM. This decline, coupled with other moves such as decreased NSS rates, make a strong case for imminent monetary policy easing.
Stock Specific Activity
To help curb the power crisis, the Energy Conservation Plan was drafted for nationwide implementation. In addition, the government announced the conversion of outstanding dues to banks for exchange of PIBs, thus devising a mechanism for direct intervention in the power sector. This move was taken as a positive by investors who showed increased interest in banking sector stocks. Banks are expected to benefit from this decission primarily in the form of restarted interest income stream from the investments which had previously dried up in the shape of long outstanding dues. However, the impact on power companies in terms of further credit available from the banking sector is uncertain as this depends upon banks willingness to take exposure again. Apart from this, the urea price hike instigated by ENGRO in anticipation of planned gas shut-downs sparked considerable interest in fertilizer stocks all round.
Forward Looking Expectations
Investors have seemed to play a wait-and-watch strategy with respect to MPS, which is TBA on Oct, 08. A 50bps discount rate cut seems to be on the cards, however, it is pertinent to note that with all the talk surrounding potential easing now that we have broken away from the IMF program, the a surprise other than a 50bps cut would surely have implications for the market. Moreover, we expect the political situation to play a key role in the upcoming week. Another aspect worth monitoring are impending oil payments now that the power sector has been injected with added liquidity. It is likely that Pakistan would feel the need to build-up on oil stocks with this added cash, hence putting pressure on imports, in turn, our exchange rate in the short-term.