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Fund Manager Review on Economy - July 2022

Sarmaaya Desk
Sarmaaya Content Team
Fund Name AUM No of Funds Market Outlook for future
NBP Fund Management Limited 170 bn 43 Positive
ABL Asset Management Limited 77 bn 30 Neutral
UBL Fund Managers Limited 117 bn 38 Positive
Al Meezan Investment management limited 161 bn 33 Positive
National Investment Trust limited 89 bn 15 Positive
NBP Fund Management Limited Review:

During the month of July-22, the benchmark KSE100 index fell by around 1,390 points, translating into negative monthly return of 3.3%.The market remained in the positive territory during the first half of the month as there was growing optimism and signals from the Finance Minister that the country has met most of the conditions of IMF. Index rebound was also triggered by healthy price upticks in heavy weight E&P stocks, as ECC of the Cabinet decided to revise upward the gas prices for various categories of consumers. The step was important to arrest revenue shortfall of gas distribution companies and at the same time improve cashflows of entire energy chain. The energy sector stocks reacted positively to this development. Staff-Level Agreement (SLA) with IMF was reached mid of the month to complete the combined 7th & 8th reviews of Extended Fund Facility. Subject to Board approval, about USD 1.2 billion will become available while IMF Board will also consider an extension of EFF until end-June 2023 and an augmentation of access by SDR 720 million that will bring total access under the EFF to about USD 7 billion.
During the month, SBP raised the Policy Rate by further 125 basis points, taking the benchmark rate to 15%. Inflation reading for the month of July-22 clocked in at 24.9% driven by high food and energy price increments on a yearly basis. Owing to sharp increase in current account deficit (CAD) of USD 2.3 bn in June (FY22 CAD of USD 17.4 bn, up from USD 2.8 bn in FY21) and accompanying decline in SBP reserves, there was immense pressure on Rupee, that fell massively by 17% during the month under review and shook the confidence of the investors. Rising yields on some of Pakistan’s international Sukuks and Eurobonds that reached alarming level of around 50% further unhinged confidence as it also fuelled the solvency concerns of the country. Thus, the KSE100 index fell by around 2,000 points during the second half of the month, to settle at 40,150 points.
During the month, Commercial Banks, Food & Personal Care, Glass & Ceramics, Oil & Gas Exploration, Oil & Gas Marketing and Technology & Communication sector stocks outperformed the market. On the contrary, Auto Assemblers, Auto Parts & Access., Cable & Elec. Goods, Cements, Engineering, Fertilizers, Pharmaceuticals, Refinery sector, stocks lagged behind. On participant-wise activity, Individuals & Foreigners emerged the largest buyers, with net inflows of around USD 9 million and USD 7 million, respectively. On the other hand, net outflows of around USD 12 million and USD 8 million were seen from Mutual Funds & Insurance, respectively.
From fundamental perspective, market is trading at an attractive Price-to-Earnings (P/E) multiple of 4.2x, versus historical average of 8.2x. The market also offers healthy dividend yield of around 7-8%. Taken together, we advise investors with medium to long-term horizon to build position in the stock market.

ABL Asset Management Limited Review:

In the month of Jul'22, KSE100 index witnessed a further decline of around 1,390 points to close the index at 40,150. Multiple factors contributed in lowering the equity index again this month. The main culprit behind lowering of the index was the free fall depreciation of rupee against dollar, which saw a downward freefall of around 16% on MOM basis and closed it at around 239 PKR/USD. The depreciation of rupee raised further inflationary concerns among investors as Jul'22 CPI has already been recorded at 24.9%. Political temperatures also spiked with the Supreme Court ruling out CM Punjab in favor of oppositions candidate. However, on the positive side government reached a staff level agreement with the IMF and has paved the way for the IMF board meeting next month for release of $1.2bn tranche. KSE100 index witnessed a decline of 1390 points (~3.35% MoM) to close the month at 40,150 points. There was a decrease in the average traded volume and value by 24.2% MoM to 73.51mn and 27.7% MoM to USD 16.67mn, respectively. Foreign investors were net buyers of shares worth USD 7.5mn. On the domestic front, Individuals and Companies bought with a net buying of USD 8.65mn, and USD 3.81mn while mutual funds and insurance companies were net sellers of USD 11.91mn and USD 8.41mn, respectively.

UBL Fund Managers Limited Review:

Continuing its losing streak from previous month, the local bourse gave up further ground in June with the benchmark KSE100 declining by 3.6% during the month. Notwithstanding favorable news flow on FATF, improvement in forex reserves and progress on IMFPakistan talks, a tough FY23 final budget, with inflationary bias and disproportionate taxation measures for the corporate sector/salaried individuals, dampened investor sentiments leading to a sell-off during the last few trading sessions of the month. The original budget failed to get the nod from IMF, forcing the government to roll back most of the relief measures. Large corporations now face additional 10% tax in 2022, which reduces to a permanent 4% in subsequent years. Foreigners remained net sellers offloading shares amounting to USD12.4mn during the month. Among domestic investors, companies and individuals remained net buyers, mopping up shares worth USD22.2mn and USD20.9mn.
We maintain a sanguine view on equities as the local bourse is currently trading at much discounted forward PE multiple of 4.1x as compared to historical PE of 8.5x. Also, market's current earnings yield differential with 10Y PIB yield is 11.5% (24.4% vs. 12.9%) which is much higher than the average yield gap of 1.1% over the last 15 years.

Al Meezan Investment Management Limited Review:

The market remained in positive territory in the early part of the month hitting its intra month high of 42,075 points after IMF staff level agreement despite the rise in policy rate. However, it declined by 4.6% from month's high as PKR devaluation exacerbated during the month amid hefty import payment while change of government in Punjab added to uncertainty over the tenure of Federal government. Another reason for market concern came after key Global Ratings agencies cut Pakistan's credit outlook to negative from neutral.
For the equity market, we expect the renewal and eventual completion of the IMF program as the key trigger for FY23. It will help Pakistan to achieve a much-needed fiscal discipline and help in building of forex reserves. Positive outlook for the market remains on back of robust corporate earnings growth and very attractive valuations with P/E of 4.0x compared to its long-term average P/E of 8.2x. Although the short-term equity market performance is likely to remain rangebound until forex reserve situation improves. In the medium term, however, following tough economic actions and likely decrease in commodity cycle, interest rates are likely to revert back to long term mean, which shall lift equity market returns.

National Investment Trust limited Review:

The KSE100 index posted a return of -3.35% for the month of July, 2022. The market started off in the new fiscal year on a negative note with the PKR losing 17% of value against the USD. Political noise also kept the market sentiment muted . During the month, SBP raised its policy rate to 15% depicting an increase of 1.25%. Market activity also remained subdued with monthly average volumes during July, 2022 down 31% on a MoM basis standing at 145 million shares. Foreign investors remained net buyers during the month July, with net inflow of USD 7.48 million. During the month of July 2022, the benchmark KSE100 index declined by 3.35% whereas your Fund's NAV decreased by 3.55% thus giving an underperformance of 0.20%.
All the market expectations hinges upon the release of IMF tranche of USD 1.2bn in Aug'22, which will help to replenish its declining foreign exchange reserves and will bring much needed stability to Pak rupee.

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