July 14 - 20, 2008

PAGE: What are the reasons for the current bearish sentiments prevailing at the local equities market?

AAR: It may not be right to say that it is only recent and also a local phenomenon. To put the things in the correct perspective one needs to look at six months horizon. The story started with some of the banks announcing fabulous results and then releasing corrigendum showing that either these entities have posted nominal profit or incurred losses. Then talk about possible increase in interest rates, reduction in margins of OMCs and refineries, political melodrama and subsequently exchange rate volatility and mounting trade, current account and budget deficits hinted towards beginning of turmoil. The situation is not all that complex but inability of the economic managers to identify the root cause of problem and taking timely decisions dampened investors' hopes. Now most of the equities markets around the globe are under extreme pressure. The causes are known to all and include hike in energy and food prices and eroding value of dollar against all the leading currencies, most important euro.

PAGE: Are the measures taken by the SECP sufficient to create bullish trend in local equities market?

AAR: It may be said that the initiative taken by the Securities and Exchange Commission of Pakistan in consultation with the Karachi Stock Exchange have helped in achieving the desired results to a large extent. The prime objective was to resist freefall and fixing lower lock at one percent has helped in loss of points in a steep manner. However, it may also be said that the measure does not allow investors to take an exit as lower locks become applicable at trade commences. It is believed that further and more effective measures will be taken in the meeting scheduled for Friday. All the eyes are set on the formation of Rs 50 billion Pakistan Equities Market Opportunity Fund. It is expected that once the proposed Fund starts buying, it will be the turning point and beginning of another bullish run. No one can deny that values have become too attractive and every one is just waiting for the commencement of buying euphoria.

PAGE: What are the challenges and opportunities?

AAR: There is an old saying 'challenges offer opportunities' and it is entirely dependent on the risk appetite of the investors. The most soothing factor is that economic fundamentals are still intact. This has also been confirmed by institutions like Merrill Lynch. However, the point of concern is that the current economic managers have no plan to pull the country out of the prevailing economic turmoil. Most of the factors said to be responsible for the down turn are not unique because almost all the countries, developed as well developing, are suffering from the same contentious problems. However, those countries which have succeeded in formulating 'disastrous recovery plan' are better off. Pakistan has an agrarian economy and efforts to boost production and productivity of major crops can help in containing the adverse impact of 'global hike in food prices'. The added advantage will be lesser erosion of foreign exchange reserves. Foreign exchange reserves have been eroding mainly due to rising import of food items and energy products.

PAGE: What are your results expectations for the year ended 30thJune 2008?

AAR: Keeping in view nine-month results one should not expect extraordinary results. However, it may be said that earning of companies from few sectors will be exceptionally good and some sectors would post lower profit compared to last year. The OMCs will post exceptional results mainly because of inventory gains and growth in profit could be as high as 300% compared to last year. Similarly, profit of fertilizer producers is expected to improve by about 20% compared to last year. E&P sector is likely to show a profit improvement of around 12% due to higher international oil prices and well head prices along with volumetric growth of 7%. Commercial banks are expected to post mixed results depending on their quality of asset and liability products. Most of the banks are expected to post improved earnings from core business but provisioning against non-performing loans may reduce the profit.

PAGE: What are the expectations for FY09?

AAR: Corporate earnings for the FY09 will be heavily dependent on how Pakistan's economy behaves keeping in view the external and internal factors. If oil prices continue to hover around present level, the adverse impact will be more pronounced, inflation will be high and foreign exchange reserves could further deplete, putting pressure on the exchange rate. The sliver lining is the supply of crude oil by Saudi Arabia on deferred payment. It may lessen the pressure for the time being but would add to debt burden. The breathing space will provide opportunity to redefine export strategy as well as import regime to bridge trade deficit. It is also expected that crude oil prices may go down compared to present levels. However, investors are advised to focus on E&P and fertilizer companies and IPPs on long term basis.

As stated earlier Pakistan does not suffer from issues which are unmanageable. The whole world is suffering from hike in energy cost and Pakistan cannot be an exception. However, the miseries can be lowered by removing inefficiencies in the system, containing wastages and developing alternate as well as low cost resources.

Policy planners will have to develop policies to tackle trade, current account and budget deficits. Greater focus on agriculture is also needed to contain import of food items and boost export of commodities i.e. cotton, sugar, rice, corn etc. Similarly, import of edible oil can be contained by increasing local production of cotton, corn, sunflower and canola.

To conclude I would say unless Pakistan's economy become robust, equities market cannot expand. To achieve exportable surplus, new manufacturing facilities have to be created and equities market is right place to mobilize capital.