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Sunday, March 29, 2020

COVID-19 Impact on Different Business Sectors

Disclaimer: This article is a personal viewpoint of the author and does not constitute professional investment advice nor it is written with an intent to form an opinion on the equities market or promote any specific stocks.

The spread of COVID-19 is likely to leave a long-lasting impact on our economy, culture and way of life. We will make a short analysis of its commercial impact on various business sectors especially those with a strong presence on the Pakistan Stock Exchange (PSX). Currently, the pandemic spread threatens our economy as industrial activity grinds to halt but also erodes out individual prosperity due to mass layoff. And risk pushing more population below poverty in an already fragile economy facing many challenges. 

Cement & Steel: construction has ground to halt and the labor movement is severely restricted due to inter-city transport shutdown. Cement plants have ceased all major production in compliance with government directives to limit the spread of COVID-19 infections. Cement off-take from dealers has also come to halt. In the absence of any government-backed incentives, the sector will struggle a lot to stand on its own. 

Food & Edibles: while eating is essential for survival, the sector is not immune to COVID-19 induced economic shocks. Demand is already shrinking due to lockdowns, especially of commercial food outlets. Many households are suffering a partial or total loss of income which leads to the rationalization of food spendings. Prices and profitability can take a further hit due to COVID-19 induced economic recession. 

Energy & Oil: While electricity demand is expected to stay relatively stable due to a large number of population staying at home, there is a limited movement out on the street. Fuel consumption per capita has fallen at large while global crude prices continue to slide downwards. There is a risk of inventory losses on the pre-crisis accumulated stock of fuel by OMC while OEP can be hit by lack of demand at the refinery level which is in-turn fueled by demand-side losses of OMC - its a round cycle feeding off each other. Impeding risk of recession can further erode long term purchasing power which will hit fuel demands as consumers cut the cost of living by adapting to cheaper modes of transport. Power generation can face short term cash crunch due to probable government back package of deferred payment facility for power and gas bills. Combined with the risk of recession and loss of income for households and industries, there is higher exposure to the financial risk of consumer's default. 

Finance: Shut down of production, reduction in household income and cancellation of export orders can create financial pressures across the entire economic chain. Financial institutions are exposed to a greater risk of non-performing loans, higher demand for risky debt restructuring and even outright defaults. 

Pharma & Health Care: Demand for pharmaceuticals and health care is naturally expected to increase during any bio-emergency. Foreign multinationals have announced significant success in their combat against COVID-19 by exhibiting a plethora of drugs, vaccines, research and testing kits. This may have a fallout positive impact on their locally affiliated pharma companies listed on PSX. Shortages of raw materials from China and India along with transport related difficulties due to shut down of air-traffic are looming concerns of the pharma industry ( source ).

Auto: this sector has already been on a ventilator even before the COVID-19 crisis was ever heard of. And the impending risk of economic recession and disposable incomes being hurt does not look like a good spell for this sector. Some manufacturers have offered to produce medical goods which may keep their production capacity engaged but the volumes may not be big enough to cause any miracle financial turnaround in the short to medium term. A significant interest rate cut can be a boost depending on how much traveling habits return post-crisis. 

Fertilizers: So far lockdown does not seem to have any significant restriction on agriculture activities and the government is showing a soft corner towards the sustenance of this sector by offering financial incentives. This aims to reduce farmer's hardship and reduce food production costs overall. Cheap and plentiful food is essential for quick post-crisis recovery and avoids extensive deterioration of the lower-class shall the recession persist longer than expected. 

Textile: A labor-intensive industry already in economic doldrums is expected to take the harshest hit from COVID-19. Export orders worldwide are at risk and we should expect no exceptions. While the real magnitude of the crisis will be known post-crisis, looking around the world for impact on a similar industry does not paint a rosy picture. Two billion dollars worth of export orders were canceled in Bangladesh alone ( source ) while Pakistani exporters are also complaining about the rise in order cancellation ( source ). The textile sector has the potential to partially recoup their losses by reorienting their production towards medical supplies in demand such as face mask, protective suits, etc. 

Chemical & Personal Care: A large part of chemical production is geared towards agriculture and textile to results at large depending on their sectoral specialization. Those in agriculture and hygiene chemicals are expected to fare better than the rest. Personal care is also expected to fare better during and post-crisis as demand for soap, handwash, sanitizers and different hygienic products shoot up due to health-conscious public. 

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Saturday, March 28, 2020

Week 13-2020 Closing Notes

Carrying forward from previous update ( link here ), 28600 +/- 100 has been mentioned as the last line of defense which has shown retracement intraday basis however we prefer to see support and resistance honored on a closing basis to be held valid. On Mar-24, the index closed at his critical support level but failed to make any reversal the next day confirming our view that uncertainty prevails at the market and one shall remain flexible to accept the unexpected.  Currently, we do not hold a bullish or bearish view on the index, rather our opinion is that the market is reacting to panic waves worldwide with no clarity on technicals therefore cautious approach should be adopted.

WoW basis, average weekly capitalization has once again fared another worst, although not as bad as one of the previous week but still dismal performance. Capitalization improved on the last day of the trading week but we do not regard it as a positive signal until further confirmation. 

If the current positive spike is to be regarded as a correction only then resistance falls in the range of 28600-29000 +/- 100. However, if the market continues to close above this resistance line with growing capitalization then it may be assumed as short term uptrend caused by oversold conditions. Shall the market start to fall again, the bottom side remains open to a new lower low with no visible support estimated so far. 

The true magnitude of the COVID-19 led economic damage can be only estimated once the pandemic is over and life return to normal. A hypothetical worst-case scenario is an index finding support at any of these suggested levels 25700-23950-20600-17800-15000 +/- 100.  We urge not to speculate on index support and resistance until panic settles down. We also reiterate our previous stance that the market needs to close and trade above 36300 +/- 300 in order to be considered bulls return.

Looking forward, we expect value hunting season to be on in blue-chip stocks by risk-averse investors who prefer to build positions for medium to long term. While value investors and traders should hold their horses until stability returns. 

Critical dates ahead are 1-Apr and 13-May for PIB auction while MTB auction falls on 8-Apr, 22-Apr, 6-May and 20-May. Given the critical situation of equities worldwide, there is going to be a renewed attraction of local investors towards interest-bearing instruments. This hurts the equities in the form of capital drain unless the interest rates are revised steeply downwards to make these instruments unattractive. Happy trading! 

  1. MTB:
  2. PIB:

    Saturday, March 21, 2020

    Week 12-2020 Closing Notes: Corona Virus Strike III

    Previous update ( link here ) has mentioned 28600 +/- 100 as the last line of defense for market support and the index did test this level intraday basis on 19-Mar in a touch and go fashion, making an upward retracement from here and finally closing the last trading day of the week in positive with +537.58 (1.78%) points gain.

    A meager interest rate cut of 75 bps failed to make any positive impact on the market but did pull up bank stocks from a steep nosedive. 

    Although the last trading day of the week closed with slightly positive capitalization gains. However, the weekly average lost a whopping -882.55 billion PKR, by far a new lowest low record of CY2020 and worst one as well.

    Looking forward we expect the positive momentum is only an upward correction since the market became extremely oversold on an intraday basis. Therefore support or resistance levels should be re-tested on a closing basis to be valid. [Edit 21-Mar]: Index resistance now falls in the range of 34800-35500 +/- 100 points. The index needs to close and trade above 36300 +/- 300 (EMA21D) to be classified as returns of bulls. 

    A possible positive trigger is an economic stimulus package expected on Mar-24 ( link here ). 

    Uncertainty prevails at the market and it's too early to predict the market direction or possible recovery and reversal point. All estimates can be made to the best of ability with the flexibility to accept unexpected changes. 

    Thursday, March 19, 2020

    Week 12-2020 Mid Update: In solidarity with Corona victims

    As per the previous update ( link here ), it was warned that the Corona virus infected market has no bottom and do not treat an intraday pullback as a signal for buying. Rather, the market is expected to re-test its lowest support on closing basis. And Lo Behold! the market did turn both prediction true - not only did the index came down on a closing basis to its lowest support once again but it also broke its lowest support to make a new lower low close. 

    DoD basis, the market is undergoing its worst capitalization loss of CY2020 with each day record being worst than the previous one. Global panic wave is driving the selling pressure. Market capitalization has hit an all-time low of CY2020 never seen before. 

    Looking forward, we expect 28600 +/- 100 to be the last support stand of the market, breaking which is going to be an unpredictable downfall leading to the discovery of new bottom. Marginal interest rate cuts have proven to have no impact on the market. 

    SECP has stepped in with relaxed margin requirements (link here) and an uptick rule on short selling (link here) to help with market stability. The effect of which will be known in next trading session. 

    Our special prayers go out for the victims of COVID-19 and may the soul of departed rest in peace. 😭😭.

    We wish the trading activity may soon return to normal at Pakistan Stock Exchange. 

    Saturday, March 14, 2020

    Week 11-2020 Closing Notes : Corona Strike Take II

    Hell hath no fury and Corona has no bottom. With three market halts triggered in a single week, the market seems to not shed the fear of this virus. Luckily, two of the three halts ended up with a sharp intraday recovery. 

    While index bottom stands at 35500-34800-34300 +/- 100 points and already tested this zone intraday, we consider this drop to be caused by worldwide panic wave and not the natural dynamics of the market. Therefore, the bottom support remains valid to retest on a closing basis.

    On the upside, the index is expected to face resistance in the range of 36800-37500-38700 +/- 100. 

    WoW basis, the market headed to another extreme sell-off, with weekly average capitalization breaking its previous worst record. 

    Looking forward, it appears the market has hit another extreme bottom and some bounce back is expected. Market volatility knows no bounds so be ready to expect the unexpected. The market is technically trading in the bearish territory now unless significant buying returns in the following week either by improving investor confidence or capital injection by heavyweights like Insurance, Mutual funds, and government entities. 

    A possible trigger could be the launch of the NIT-PGI index on Monday 16th-Mar-20 as per PSX release here. The impact of this launch will be known after going live. 

    Wednesday, March 11, 2020

    Week 11-2020 Mid Update

    Index has remained highly volatile with investment flowing in sector specific direction. While intraday support in the range of 37500-37700 +/- 100 is being held, the index is failing to break towards any reasonable resistance. Rather is just spikes and falls back to support which is not a good sign. 

    DoD basis, market cap continue to fall once again. Looking forward, we see no clear direction of the market and it may keep swinging wildly as investor panic responds to Corona scare and its economic fallout. 

    Monday, March 9, 2020

    Week 10-2020 Closing Note

    Corona fear persisted across the week and after posting some corrective "dead cat" bounce as mentioned earlier  Index resisted once again in our predicted range of 38900 +/- 100 points and fell considerably on Friday. 

    WoW basis, Index posted its biggest single day drain although weekly average closed slightly positive. However, we expect capital drain to continue and worst is yet to come.  

    Abnormality was witnessed in cement sector with many prominent cement stocks opening gap up for few successive trading sessions follows by a sharp straight line drop on Friday. 

    Oil has crashed on the impact of OPEC+ failure to reach an agreement between Saudi Arabia and Russia on oil production cuts. The two crude oil titans are likely to ramp up production and fight the match of defending market share. 

    Looking forward we reiterate our views posted in two previous updates (link here & here) and like to remind that index has very little juice left to go further downwards therefore value hunting season is on. However, with the evolving situation on corona scare, this upside is likely to be shorted lived if situation does not improve. 

    Index Support : 37700-37900 +/- 100
    Index Resistance : 39600-39850 +/- 100

    Failing to honor its support will push the index to a new lower low and further worsen the bearish run. 

    Wednesday, March 4, 2020

    Week 10-2020 Mid Update

    With reference to our week 09-2020 closing notes (link here) it was predicted  that 39800 +/- 100 is the highest possible resistance which need to be broken on closing basis for further uptrend to continue. On 03-March, index made a high of 39866 and got rejected, triggering the red cycle once again. 

    DoD basis, market cap gained on the first trading day of week and market posted recovery of several hundred points but began to lose momentum after hitting intraday resistance the next day. We attribute this drop to profit taking by value investor who has been buying during the Corona virus slump of equities market. 

    Looking forward, as per our previous post we expect  37900-37700 +/- 100 to be interim support where value buying will be seen as index does not have much space on the lower side in short term. Trading is expected to remain range bound as long as Corona virus scare exist. Continuous down fall may push the support zone lower. 

    Happy Trading!