Excerpts from an exclusive interview with Mohammed Sohail, Head of Research, InvestCap

June 28 - July 04, 2004

After four years of stabilization and consolidation, the time seems to have come for witnessing the much-awaited take off Pakistan's economy. The Federal Budget 2004-05 revolves around incentives to agriculture, industry, and SMEs, besides setting higher fiscal deficit target to accommodate higher development expenditures. Budgetary measures including rationalization of taxes will generate a broad-based acceleration in economic activities. One thing to watch out for would be the interest rates, which may come under some inflationary pressure due to the highly expansionary budget.

There are some concrete measures and the sectors that will witness a positive impact are commercial banks, textiles, synthetic fibre, fertilizer, telecommunication and fast moving consumer goods (FMCGs). Negative impact will be the most on auto assemblers who have been hit hard with reduction in import duty on CBUs without any reduction in duties on CKD kits. The budget offers no incentive for IPPs, cement, insurance, oil marketing and gas distribution companies and oil and gas exploration sectors.

The budgetary measures pertaining to the stock market have all been overshadowed by the capital value tax (CVT). Though, there is high probability that the quantum of tax will not be as high as proposed in the budget after the hectic negotiations. However, investors have realized that the government is serious in taxing this segment, which has enjoyed huge capital gains over the last couple of years.

One sector that has expressed its gratitude is textiles as some of its long outstanding demands have been accepted. These include withdrawal of 15% GST on ginned cotton, reduction in GST on PSF and reduction in import duty on machinery. However, import duty on PSF has not been reduced owing to sovereign guarantee provided to Pakistan PTA for 15% protection till end of financial year 2008.

Some of the recent IPOs and POs have increased the number of quality scrips and market float. Another factor that has kept the equities market buoyant is the growing size of mutual funds, estimated around one billion US dollars. While PIA failed in sparking investors' interest, public offer for Pakistan Petroleum and Kot Addu Power Company are anxiously awaited. The poor response to public offer of PIA shares can be attributed to pricing and no dividend for subscribers to the public offer.

One of the factors that have been the source of uneasiness for the investors is the KSE-100 index movement. The index is biased towards OGDC and PTCL and does not depict true picture of market movement. Therefore, there is an urgent need to redefine the weightage of these two scrips in the index. However, a positive development is that while the number of active scrips was around a dozen in the past, the number has gone above two dozens lately. This has reduced the market volatility to some extent.

With the introduction of online trading of stocks two important features have been witnessed, investors are able to make their own decision and are taking advantage of the research reports prepared by some of the brokerage houses and reports printed in newspapers and magazines. The institutional investors as compared to retail investors use these reports more extensively. The reasons being that the decision makers in the institutions are accountable.

The size of Pakistan's equities market, in terms of market capitalization is estimated around US$ 25 billion. However, the number of professionally qualified and experienced equities analysts is around twenty five only. Some of the large financial institutions, which have large investment portfolio, mostly use reports prepared by credible brokerage houses. They also have some in-house analysts. The reason now investors refer more to research reports is that investment decisions are being made on future earnings potential of companies rather than on the basis of historical data. Preparation of earnings forecast is not an easy job and requires in-depth knowledge about the sector as well as the company.

With the imposition of CVT and other taxes the average daily trading volume is expected to come down. However, on the basis of economic fundamentals and improved corporate earnings the market is expected to remain attractive for the investors. Saying this it is also necessary to reiterate that the political uncertainty may keep the market subdued. There is a suggestion that investors should give more attention to equities research rather than making their investment decisions on the market gossip.