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BEARS RULE PERSIST DESPITE HISTORIC MSCI UPGRADE AND NEW TAX MEASURES

SUMMARY

Government’s decision to impose taxes on dividends and capital gains along with reintroduction of super tax hurt investors’ sentiments at the stock market on Monday as the investors went for profit-taking. On Monday market closed at 52,138.9 points thus shedding 497.97 points.

During Monday the major laggards were Habib Bank (-2.4%), Lucky Cement (-2.81%0, UBL (-2.60) and Pak Elektron (-3.93 points), which cumulatively work out -247 in the total drop out. The trading volume too fell to 203 million shares. The market remained in bearish mode throughout the day.

Tuesday continued to be bearish at stock exchange. The stock shed 685.74 points to close at 51,453.16 points. The market took the new taxation measures announced in the Budget 2017-18 as negative. Banking sector led the decline with MCB (-3.45) and HBL (-2.72) declined. Profit-taking was witness in the steel sector as the news that steel is to becomes expensive due to budgetary measures.

International steel closed at its lower circuit with International Industries (-4.90%) and Aisha steel (-3.62%).

On Wednesday (the day before Pakistan was re-included in MSCI) $987 million of foreign portfolio movement was executed, but foreign portfolio of $452.5 million was not enough to match foreign out flow of $534.4 million resulting in net selling of $81 million on May 31. At close the Pakistan Stock Exchange (PSX) bench mark 100-share index finished with a fall of 861.59 points to close at 50,591.57.

The market responded in a most unexpected manner on June 1, the day Pakistan upgraded to MSCI Emerging Market. During Thursday, the KSE-100 Index suffered an intra-day fall of over 2,230 for its biggest decrease in term of points. Later due to retreat the market closed 48,780.81 point dropping 1,810.76 points. Several stocks including those in the MSCI Pakistan index hit their lower limit.

Bearish trend continued for the fifth day of the week as foreigners continued selling $23.44 million on Friday. During the week foreigner sold $149.53. The Index shed 225.51 points.

PARTICIPANTS/ACTIVITY

On average shares of 378 companies were traded. Of these 97 were gainers and 268 were losers and 13 remained unchanged.

Foreigners were net seller of $149.53m during the week; companies were net seller $7.75m, Banks were buyer $31.69m; Mutual fund net buyers $11.90m and individuals net buyer $74.74m.

Volume leaders during the week were: Power Cement (R) 87m; K-Electric 83m; Engro Polymer 52m; United Bank xd 37m; OGDC 27m; Engro Corp 23m; Aisha Steel Mill & Fauji Cement 21m each; Bank of Punjab 11m and Inter Steel Ltd 9m.

TRIGGERS

– Companies would be bound to pay out at least 40 percent after tax profit in cash dividend or bonus shares or else face a tax levy of 10 percent incase of non-compliance regards less of its paid-up capital.
– The budget proposes a single levy of CGT at a flat rate of 15 percent for filers and 20 percent for non filer.
– The budget has extended tax credit for enlistment for initial two years at 20 percent and at 10 percent for the subsequent two years.
– WHT on dividend has been raised to 15 percent from 12.5 percent and for mutual funds to 12.5 percent from 10 percent.
– One percent reduction in corporate tax rate to 30 percent.
– Minimum turnover tax enhanced from 1 percent to 1.25 percent.
– Continuation of super tax at the rate of 4 percent for banks and 3 percent for other corporations for another year.

FUTURE OUTLOOK

The week was important in the history of PSX as Pakistan regained on June 1, the emerging market status it lost almost years ago. Foreigners remained net seller on the same day with $81.8m when $987 million worth of shares were traded. All the transactions were smoothly handled by the Pakistan Capital Market infrastructure institutions i.e. PSX, NCCPL and CDC. Qatar and UAE were not able to handle the high amount of volume.

Being part of the EM Index signals that the country’s capital market has attained greater maturity in terms of efficiency, governance and regulatory framework. This encourages longer term investment in both portfolio mode as well as direct foreign investment (FDI).

RAEES UDDIN KHAN – Research & Development Institute of Securities Management & Research Karachi

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