The rise of Mutual funds part 2

Link to my previous article ( https://www.brecorder.com/news/40023943)

In the start of October, I wrote an article on how Mutual funds were operating in PSX and how their impact was more pronounced that we can imagine. Part 2 will review the developments till the end of Oct 24.October was also a very interesting month in terms of Mutual funds and how they operated in this challenging market.

Before we go into details on how things turned out October has been an interesting month for Pakistan stock exchange due to various issue. I will rate the issues in order

1. FATF Decision
2. Interest Rate assumption / predictions
3. Global Dollar variation
4. Results of major Banks / O&G / Cement companies
5. Pakistan macroeconomic indicators & Inflation
6. Political instability

Yes, you read it correctly political instability is the last in my list and rightly so. It is unfair to corelate stock markets with political instability as the first and foremost reason for market performance since rarely it corelates and even if it does its not usually due to political instability. People don’t invest or take out money because of 1 or 2 jalsas or cases; people take out money drastically when FATF decision, Monetary fluctuations or Interest rate change since it directly impacts ones earning in the short term. Imran Khan getting disqualified will still mean that Engro fertilizer will give 5 Rs dividend after book closure on 26 November and its sales would remain similar in the longer run as well. But an interest rate change completely changes the dynamics of the market when debt-based instruments seem more beneficial to invest in rather than investing in an uncertain stock market.

Though these are fundamentals in Pakistan but economist generally put this theory (of political instability) in place which is true as well but most stocks in PSX already have a 7.5% cap and no political instability has resulted in touching those 7.5% caps. The only recent times when I have seen blood baths is when Pakistan joined the emerging markets from Frontier market and we saw a huge drop in July 2017. The next major drop was seen during Covid start days mid of march and I shared in the past thread how Mutual funds also sold considerable volumes of shares during the same Mid of March sell off.

There are many reasons why market behaves the way it does but one thing is for sure whenever the volume dies , interest in market drops, the market starts taking a nose dive if the sectors who invest in market do not try to buy or find it viable to buy shares at that time . Thank fully for Pakistan we do have daily caps otherwise due to our abysmal volume these sharp falls would be much worse. As for the political instability it is a factor but if fundamentals are correct in the shorter run and results of major companies are reasonable, market forces will balance the negativity of a few investors.

FATF decision was looming this month (oct) and thus PSX was under immense pressure as well throughout the month. KSE 100 started the month at 40,516 and on Oct 23 closed at 41,266 points. Few low volumes were seen from 11 Oct – 19 Oct but that could be contributed to the overall anticipation of FATF, political uncertainty, and over all global uncertainty. However, if we compare the KSE indices (Figure 1) during the same time it has been relatively stable throughout the low activity period and then rose during high volume sessions leading to FATF verdict.

In terms of Mutual funds some interesting behavior is seen Mutual funds were net sellers by 16.32 million $ from the start of October while insurance companies and banks were net buyers over all during this time. However, if we review the breakdown the major focus of Mutual funds in selling were the oil and gas exploration segment. They also did profit taking for fertilizer and cement. in the week leading to FATF, Mutual funds were the biggest net buyers at 7.62 million $ (figure3) despite being net sellers on 23 Oct so only in 4 days they outnumbered every other major investment segment.

Things get more interesting if we see the breakdown of net buying of Mutual funds. Mutual funds were net buyers in cement by 5.01million$, banks by 2.18 million$, fertilizer by 1.93 million$ but were net sellers in Oil and Gas exploration sector.

Now one should ask why only these sectors? While Dr. Hafeez Pasha in his article Conflicting signals(https://www.brecorder.com/news/40027482) was doubting on the LSM cement numbers , Mutual Funds were investing in cement sector based on the recent cement sales numbers of August and September. The export increase of cement also became apparent and was clocked at 8.27% YOY increase for q1 2020. Also, in September cement sales of 5.21 million tons were the highest ever dispatches in Pakistan. As major economist tried to doubt these numbers the doers invested in cement and as per the result declaration today their investment seems to have paid dividend already. Garibwal cement EPS 2020 rose to 0.66pkr from LPS 2019 0.59, Maple leaf cement EPS rose to 0.51PKR from a loss of 1.41 in 2019, DGKC LPS rose to 0.80 from an LPS of 3.26 YOY, Lucky cement more than doubled their Earning per share from 2.96 to 6.89 for the quarter that ended in September. These comparisons are on a year on year basis, quarter on quarter results will be obviously different. Obviously, the major cement players Bestway, Cheerat, Fauji and Attock results are still pending but it is expected they will show and year on year improvement as well.

Mutual Funds refrained from the oil and gas exploration sector based on their cashflow issues and lack of dividends in the short term. Oil prices are a huge aspect of investing in an oil and gas company and thus lower oil prices generally have seen lesser interest in the oil and gas exploration sector. Ironically today PPL EPS announcement of 5.27EPS Is higher than EPS of q1 2020 i.e. 5.23. But since no dividend or bonus announcement made along with major structural issues with the oil and gas sector the enthusiasm is not visible.

Fertilizer is a sector that is very close to my heart. Both my paternal and maternal grandfather were middle class stock investors who invested all their savings in stocks and after retirement they survived on stock-based income. One tip they always use to give me is to invest in fertilizer sector as it was the core sector of the Pakistani economy. Being the number head, I am I never believed them since their opinion was based on their experience and not any numerical data provided to me. But still I did listen to them and invested in fertilizer sector. Two major players in Fertilizer sector in PSX are Engro Corp / Engro Fertilizer and Fauji fertilizer. they both are in positive EPS and are regularly dispensing dividends on a quarterly basis. After the blood bath in mid of march, fertilizer though did take a drop but if we see this sector was the first one to reach pre march level by mid of April. The inherent nature of dispensing out dividends every quarter (skipped some though) made it the safest sector to invest in Pakistan especially during uncertain Covid times and for sure they didn’t disappoint.

FFC announced 3.25rs dividend in Jan 2.5rs dividend in April and 2.75 Rs dividend in July and it is expected that it will announce another dividend soon as well which should take it to 11 Rs per year or slightly more.

Engro fertilizer announced 2rs dividend in February 4 Rs dividend in July and Smashed a huge 6 at the end by announcing 5 Rs dividend in October. For a share price of 60- 70, within this year Engro Fertilizer has given 11 rupees dividend. As the last investment was announced, Mutual Funds logically invested in the sector to gain from the announced results.

Though Pakistan market is small and can be manipulated by major players but players who play on fundamentals and invest based on ground realities will always reap benefits. This Fundamental assumption that political instability or manipulation by major players may not hold true especially on blue chip stocks which are paying regular dividends. If we make our base with companies who are focused on giving quarterly returns rather than those cherry picks of stockbrokers from their candle stick analysis much can be achieved. A company with a negative ep of 129.94 and priced at 15.73 will only be speculation or a trader selling you a fake narrative. Markets are difficult to understand but if we keep it simple and focus on actual numbers rather than rhetoric’s of economist on tv or major stock traders one does make a decent return. Thank you Muhammad Abowath & Ebrahim Kazi for teaching me this, though you are not with me now thank you for instilling in me that Fertilizer is the core of the economy, your grandson just got 5Rs dividend per share Alhamdulliah.