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Feb 24, 2020: Seoul led a sharp drop across Asian equity markets Monday as South Korea announced a surge in COVID-19 infections, while oil plunged and safe haven assets rallied on growing concerns about the global spread of the deadly virus.

With the outbreak showing little sign of easing investors are increasingly concerned it could have a much longer term impact on the world economy, which was already stuttering, with a number of companies warning about their bottom lines.

Traders had been broadly optimistic that the virus -- which has killed nearly 2,600 and infected 80,000 -- was being contained outside China but a spurt of infections and deaths in other countries including South Korea, Italy and Iran has fanned fears of a wider outbreak.

"While the coronavirus is probably slowing in China, it is speeding up elsewhere," Charles Gillams, at RJMG Asset Management, said. "Its impact on Chinese business is already deep. So, whether that has a one economic quarter impact -- of some severity -- or is a bigger issue remains unclear and indeed we won't know for while."

On Monday, South Korea reported 161 more cases, taking its total to 763 and making it the world's worst hit country outside China, with seven people now dead.

President Moon Jae-in has raised the virus alert to the highest "red" level, in a bid to strengthen the government response to the spiralling outbreak.

News of the spread hammered the KOSPI, which sank more than three percent in early trade, with market heavyweight Samsung diving 3.4 percent. The won fell 0.7 percent and is sitting at a six-month low.

- 'Extremely problematic' -

Hong Kong shed 1.5 percent, with Sydney and Manila each dropping more than two percent. Shanghai, Taipei, Wellington were all off more than one percent. Singapore and Jakarta were off around 0.6 percent apiece.

The losses tracked a sell-off on Wall Street, where the S&P 500 and Nasdaq each gave up more than one percent, while US 30-year Treasury yields hit an all-time high, indicating a rush into the safe havens.

Chinese President Xi Jinping said the epidemic was the "largest public health emergency" since the founding of the People's Republic in 1949 and admitted authorities must learn from "obvious shortcomings exposed" during its response.

Beijing will decide later in the day whether to postpone its annual parliament session for the first time since the Cultural Revolution owing to the epidemic.

Meanwhile, Italy has introduced severe containment measures previously seen only in China, with more than 50,000 people in about a dozen northern Italian towns told to stay home.

The virus, which has infected at least 152 people and left three dead, has also led to the cancellation of several shows at Milan Fashion Week and the early closure of the Venice Carnival.

"Of all the alarming aspects of the rapidly spreading virus out Wuhan is that it's showing up in patients with no connection to China or the city of Wuhan, ground zero for the outbreak," said AxiCorp's Stephen Innes.

This, he added, suggested "things are about to get extremely problematic, and market conditions could get exponentially worse this week".

The fear on trading floors has sent gold, a go-to asset in times of uncertainty, to a seven-year high, while high-yielding, riskier currencies including the Australian dollar and Indonesian rupiah, were well down.

Crude prices tanked on worries about plunging demand from China, which is the world's biggest importer and consumer of the commodity. Both main contracts are down more than 10 percent so far this year.

- Key figures around 0300 GMT -

Seoul - KOSPI: DOWN 3.1 percent at 2,096.69

Shanghai - Composite: DOWN 1.5 percent at 26,905.37

Hong Kong - Hang Seng: DOWN 0.9 percent at 3,013.37

Tokyo - Nikkei 225: Closed for a public holiday

Brent Crude: DOWN 3.3 percent at $56.60 per barrel

West Texas Intermediate: DOWN 3.0 percent at $51.77

Gold: UP 1.2 percent at $1,663 per ounce

Dollar/yen: DOWN at 111.55 yen from 111.57 yen at 2200 GMT

Euro/dollar: DOWN at $1.0830 from $1.0843

Pound/dollar: DOWN at $1.2948 from $1.2964

Euro/pound: UP 83.64 pence at 83.61 pence

New York - Dow: DOWN 0.8 percent to 28,992.41 (close)

London - FTSE 100: DOWN 0.4 percent at 7,403.92 (close)

-- Bloomberg News contributed to this story --

AFP/APP

February 23, 2020 (MLN): The departed week observed several important developments on the regional and international front that serve as a gateway for Pakistan to economic development. These developments include;

On Friday, The Financial Action Task Force (FATF) during its plenary meeting held in Paris has agreed to maintain Pakistan’s status on FATF’s Compliance Document, normally referred as the Grey List till June 2020.

The same day, Pakistan and Japan agreed to enhance mutual collaboration in myriad fields including infrastructure development, higher education, and cultural and academic exchanges. The understanding came during a meeting between Prime Minister Imran Khan and President of Japan International Cooperation Agency Shinichi Kitaoka in Islamabad.

Furthermore, to provide maximum relief and facilities to the masses, the Federal Cabinet decided not to increase the prices of gas and electricity for domestic, industrial consumers and Tandoors.

On Thursday, the Competition Commission of Pakistan approved the Uber-Careem merger through a Phase-II Order, imposing pro-competitive and tough conditions ensuring a level playing field for the new entrants/competitors in the app-based Ridesharing market.

Besides, the Standing Committee on Privatization of the National Assembly in its meeting on Thursday considered few amendments in Privatization Commission Ordinance2000, which are necessary for swiftly pursuing active privatization plan. The proposed amendments empowered Prime Minister to appoint chairman, secretary or any board member. The Prime Minister may appoint a special medical board to determine the health of chairman, secretary or any board member of PC and, lastly the Privatization Commission may be able to open accounts in any of high credit rating banks.

In addition to this, ECC in its meeting on Wednesday, approved public sector procurement of 8.25 million tons of wheat Rs 1365 for the coming season. If the need arises, 0.5 million tons will be imported around the year to cater for any shortages.

Meanwhile, Adviser to the Prime Minister on Commerce Abdul Razak Dawood said that the government was committed to removing all the obstacles in way of enhancing pharmaceutical exports up to the US $5 billion with the special focus on increasing the exports volume through tariff rationalization, trade-related investment, institutional reforms and easing of business regulations.

On the energy front, Exploration and Production (E&P) companies, operating in Pakistan informed that they, have so far drilled 18 offshore oil and gas wells including Kekra-I to discover hydrocarbon deposits in the deep-sea waters but could not get the required results.

Moreover, Gwadar Development Authority (GDA) director-general Shahzeb Khan Kakar said the upcoming oil city project in Gwadar was going to host a multibillion-dollar Saudi Aramco refinery and expressed hope the process of land allocation for the $10-billion Saudi oil refinery project and a $1-billion petrochemical complex would be completed within a couple of months.

On the upside, Mr Ahmad Hanif Orakzai, Acting Secretary, Economic Affairs Division, Government of Pakistan and Prof. Andrew Campbell, Chief Executive Officer, Australian Center for International Agriculture Research (ACIAR) signed Memorandum of Subsidiary Agreement on “Understanding the Drivers of Successful and Inclusive Rural Regional Transformation and Sharing Experiences and Policy Advice in Bangladesh, China, Indonesia and Pakistan”. Under this agreement, Australia will provide AUD 1.2 million for a programme to be completed in three years till 2022.

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February 23, 2020 (MLN): The reverse repo rate has risen dramatically from its lows of 6.25 percent in December 2017 to 13.75 percent in July 2019 as the State Bank of Pakistan (SBP) fought to rein in inflation, a leading global financial service provider Credit Suisse Group said in a report.  

In doing so, the central bank also fulfilled the policy actions required by the IMF. Rates have been held steady since then and “we do not see further rate increases on the horizon”, the report said.

With inflation remaining elevated, it seems too early for a rate cut and we believe the SBP will most likely await firm signs of disinflation before doing so. In addition, real rates remain low implying limited pressure for rates to be reduced in the near term.

Rupee

In parallel with the sharp increase in base rates, the PKR was devalued by 33 percent from December 2017 to July 2019. Most of the devaluations were undertaken in a series of 5 percent–6 percent steps and occurred against the backdrop of the government’s negotiations with international donors to bridge its estimated 12 billion dollars financing gap, Zurich-based Credit Suisse said.

The run-up to the EFF approval saw a disorderly weakening of the PKR by a further 15 percent, which we believe was driven by moves to comply with the IMF’s final prerequisites for the funding arrangement.

This was not a surprise, as the central bank governor (newly appointed in May 2019) was previously the IMF’s senior representative in Egypt, where he oversaw similar policy initiatives.

Importantly, however, the approval of the EFF arrangement triggered a slow and steady 4% appreciation in the PKR, with extremely low levels of volatility. In our view, this points to the currency being brought back under control and suggests limited downside risk, going forward.

“We expect the PKR to remain stable going forward, supported by Pakistan’s commitment to the EFF program. Thus far, the IMF’s assessment of Pakistan’s progress has been positive and on track”, the report said.

A continuation and improvement in this trend could support a modest overshoot on the REER. “We note that a move in the REER back to 105 (in line with levels seen prior to 2014) would correspond to a further 2 percent–4 percent appreciation in the PKR, according to our estimates.

Pakistan Stock Exchange

“At its trough in August 2019, shortly after Pakistan had entered the EFF agreement with the IMF, the KSE100 Index lost just under half its value vs. the peak in mid-2017”, the report said.

The stabilization in the currency and subsequent improvement in economic indicators have supported a strong 51 percent rebound in the index, decisively breaking the index out of its preceding downtrend

Forward P/E ratios have consequently moved out from deep value levels; however, they remain below their long-term average. Relative to the emerging market (EM) universe, Pakistan’s P/E ratios are still considerably undervalued.

Earnings forecasts have remained robust – even the recent spate of downgrades was not enough to push earnings momentum into contraction for any meaningful amount of time (Figure 15).

A the time of writing report (21-2-2020) the index is consolidating the recent substantive gains. Given the scale of the rally, and the subsequent normalization in exchange rates.

“We expect the index to remain range-bound near term. However, on a 12-month horizon, we see significant scope for further upside supported by earnings upgrades and cheap valuations. There is additional support from the attractive 6.4% forward dividend yield”, the Credit Suisse report said.

A key drawback for international investors, however, is low liquidity in the index. Equities as a whole saw trading volumes decline from a peak of $1.4 million daily in early 2017 to reach a post-financial crisis low of just USD 0.2 million daily in August 2019 (figures based on three-month averages). The recent rally has lifted volumes significantly, but the market is still only seeing USD 0.5 million daily.

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Equity Roundup

Dull, neutral, sideways and stagnant were some of the words used by analysts to describe trading activity during the week as the index gained less than 6 points and the average daily volume fell to 106 million shares.

A note from JS Research highlighted “The outcome of the IMF and FATF reviews continued to dominate the headlines and market sentiment, leading to some nervousness for market participants”.

The KSE100 index traded in a range of just 650 points or 1.62 percent of previous weeks close, making a weekly high of 40,698 (+455 or 1.13 percent) and a low of 40,047 (-196 or 0.49 percent).

Of the 97 companies traded during the week, 49 closed up, 44 were down while 4 remained unchanged.

Commercial Banks led the gains as they added 76 points to the index courtesy of HBL and UBL contributing 65 and 48 points respectively.

Ironically while OGDC and FFC added 26 and 24 points to the index the Oil & Gas and Fertilizer sectors took 62 and 55 points away from the index while tobacco was bad for the index’s health by 32 points.

The all share market capitalization declined by USD 222 million or 0.45 percent compared to the previous week.

Figures released by the NCCPL show that Foreign investors were net sellers by USD 8.6 million with Foreign Corporates leading the way with a net sell of 7.8 followed by overseas Pakistanis selling USD 0.685 million.

Local Investors picking up the most shares were Insurance Companies with USD 7.844 million followed by Corporates with USD 1.95 million while Mutual Funds were net sellers by USD 2.16 million and individuals were the largest sellers, offloading shares worth USD 3.128 million.

Looking forward, Spectrum Research expects the market to stay range-bound in the upcoming week the next wave of demand induced from the construction site and exports oriented sectors, which are under pressure currently due to the high inflation and interest rates.

Furthermore, spectrum research added “The step taken by the government towards controlling prices and shortage of perishable items will help to curb high inflation. Falling inflation will ensure interest rate reversal in the not-too-distant future”.

Similar sentiment was expressed by Arif Habib Research who expect “the equity bourse to remain neutral to positive on the back of conclusion of the FATF review, expected approval of IMF’s third tranche, and imposition by the Federal Government on export of essential food items (Onions, Potatoes and Tomatoes) so as to control rising inflation along with deferment of hikes in utility rates till Jun’20. Moreover, improvement witnessed on the macroeconomic front, with the Current Account Deficit (CAD) shrinking by 72% in 7MFY20 and rising foreign investment in debt securities exceeding the USD 3bn mark, also augur well”.

Forex Round

PKR ended its run of successive gains as the local currency closed at 154.20 against the dollar, down by around 3 paisa compared to last week.

The currency was fairly stable trading in a range of 12 paisa during the week as 10-day volatility declined from 0.83 percent to 0.81 percent.

Fixed Income

Yields for the longer-term PIBs retreated during the week as the 3, 5 and 10-year rates came down by 10, 17 and 12 basis points while the yields for 3, 6 and 12-month MTBs remained largely unchanged.

Weekly SPI data released by the Pakistan Bureau of Statistics (PBS) showed that Yearly growth in inflation had slowed down from over 20 percent in January to 15.97 percent as of Feb 20, 2020.

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