Inflation likely to remain under pressure

Bloomberg commodity index has declined 15 per cent from its 52-week high in June 2022. The main reason for the fall has broadly been the concerns about the diminishing demand and the recession fears, as the world enters into a longer phase of higher inflation.

With a strengthening dollar, a bigger push recently came in after China’s lower GDP growth for the last quarter, and China announcing release of its metal reserves.

To recall, the commodity prices that were already on an adrenaline rush due to the aftermath of the pandemic (higher money printing, supply bottlenecks), received a boost post the Russia-Ukraine war, reaching multi-decade highs in some cases too.

The same quickly reflected in the global inflation, leading the central banks around the world to adopt monetary tightening to blow off the steam.

Pakistan, being a net importer, would benefit from any decline in the dominant commodities. The oil factoring for 20 per cent of Pakistan’s imports is expected to witness a decline in the coming months.

To note, the country’s oil import bill reported realised price for May 2022 close to the prevailing prices at $96 (crude) and $115/bbl (POL products).

Hence, the decline may come with a lag after posting higher realised prices in the near months. Moreover, the imports of palm oil, steel and allied and cotton, accumulating to around 15 per cent of the import bill would also likely to witness a breather from more than 35 per cent lower prices from their recent highs.

Having said that, LNG imports, are still at risk of escalating over the demand from the European countries, provided Pakistan receives uninterrupted liquefied natural gas (LNG) as per the demand. Nonetheless, these imports only account for 6 per cent of our import bill.

Moreover, due to the above commodities witnessing a respite lead to expectations of the import bill receding in the dollar terms, the country’s inflation readings are expected to remain under pressure over the strengthening dollar.

The ongoing direction change in commodities are also expected to impact the listed companies. However, the Bloomberg Commodity Index is still 26 per cent higher than its 52-week low recorded in August 2021. While it would be too soon to incorporate the ongoing changes to the corporate earnings projections, we highlight Pakistan equities already trading at attractive levels of 4x P/E, favouring banks, E&Ps and high D/Y plays till the clarity on commodity-based cyclicals.