Global equity markets have started to rebound after a sharp fall last week on the outbreak of a dreaded virus in China.
Investors started to dump shares as panic gripped the market, making the Shanghai Composite index close nearly eight per cent lower, its biggest one-day drop in more than four years. Losses spread to the US and European markets.
The Pakistan stock market fell 2.4pc in the preceding week and the KSE-100 index suffered a steep drop of 1,222 points or nearly 3pc last Monday, representing the steepest single-day decline in 14 months. But the meltdown was largely on the inflation figure for January, which came out at an alarming 12-year high of 14.6pc, fuelling fears about a delay in the easing of monetary policy.
So while the world is worried about the outbreak of coronavirus, Pakistan is still free of the feared scourge and is actually reaping the benefits that accrue from the fall in commodity prices — mainly oil.
“Since petroleum imports constitute 22-27pc of the import bill, the decline in crude prices can result in containing it, which may later lead to a surplus,” says investment banker Khurram Schehzad. Concurrently, it will tame inflation and encourage the State Bank of Pakistan (SBP) to ease the monetary policy — something the stock market has been eagerly looking forward to for improved corporate profitability and a sustained bull market.
Pakistan is benefitting from the drop in global oil prices following the outbreak of coronavirus
Insight Securities CEO Zubair Ghulam Hussain says that the Chinese lethal virus is taking a toll on energy prices in international commodity markets where Arab Light is down 20pc since January. The international spot price of RLNG was hovering around $3.75 to $4 per million British thermal units (mmbtu). “Earlier in the day, a spot LNG cargo Asia changed hands at the incredibly low price of $2.75-$2.86 per mmbtu,” twitted Javier Blas, an international energy analyst, on Thursday.
Mr Hussain noted that the RLNG price for Pakistan was linked to the three-month average Brent price under the Pakistan-Qatar agreement. Pakistan imports roughly 8-10 RLNG vessels per month out of which six vessels are handled by Pakistan State Oil (PSO). The vessels come at 13.37pc of the Brent price. The remaining vessels are handled by Pakistan LNG Ltd.
“We believe if oil prices remain at their current level of around $60 per barrel, it can bode well for local industries, which are using RLNG as primary fuel at the price of $10.48 per mmbtu (January 2020)” Mr Hussain says.
In a report released on Thursday, Insight Securities pointed out that the country was in the midst of a balance-of-payment crisis until recently. Since January, Arab Light has dropped 19pc to $55.5 from $68.9 per barrel. A sustained fall was a blessing as it could help the country curb its import bill. “We estimate that a decrease of every $5 per barrel translates into the current account deficit shrinkage of $0.9 billion on an annualised basis.”
While local participants in the Pakistan stock market, both institutions and individuals, have shrugged off a bear market owing to the Chinese virus, the recent heavy sell-off by foreign investors has put a thoughtful look on the faces of some brokers and traders.
Foreigners were net sellers on most trading days last week, which dragged down the entire market. They sold shares worth $16.50 million, including a big chunk of $7.39m of stocks dumped on Thursday. Mutual funds were other major sellers. They offloaded equities worth $6.97m. Insurance companies were major buyers of stocks valued at $14.15m, followed by individuals who picked up shares amounting to $6.92m at attractive valuations.
Most market men dismissed the suggestion that the virus could have forced foreigners to flee from the Pakistan market. They affirmed that the country was not in the virus-inflicted countries. Pakistan has the weight of around three basis points in the MSCI Emerging Markets index with only three constituents, namely Habib Bank, Oil and Gas Exploration Company and MCB Bank) That was why there was no role of foreign active funds that track global markets. “It is not correct to smell a rat — the foreign sell-off last week was incidentally a bit bigger,” said a senior broker.
The impact of the declining RLNG prices on various sectors of the stock market has been worked out by analysts. Insight Securities maintains that the two RLNG-based fertiliser plants remained functional until November 2019 at the capped price of Rs782 per mmbtu. If the government decides to supply RLNG to plants again at the same capped price, then there can be savings for the government on the fiscal side owing to lower RLNG prices.
On the flipside, if international prices of urea continue their declining trajectory, the government may opt to import urea instead of supplying imported RLNG to those plants.
Declining RLNG prices will have a neutral impact on the textile sector owing to the fixed gas price of $6.50 per mmbtu. On the contrary, it will be negative for the sector if the subsidy on energy prices is removed, although falling global rates will provide a buffer.
The oil and gas exploration and production sector and oil marketing companies will be at a disadvantage since the exploration companies will sell crude at lower dollar prices while refineries and marketing companies will incur inventory losses.
Published in Dawn, The Business and Finance Weekly, February 10th, 2020