An exclusive weekly Stock Market report for PAGE
by Khadim Ali Shah Bukhari & Co.
Updated on Jan 24, 2000
Strong investor interest continued to push the KSE 100 upwards. During
the course of the week, the KSE 100 continued to breach all our resistance levels to close
up by 226 points at 1852.46. Due to this recent Bull Run the KSE 100 has earned the
distinction of being the best performing market in the world since the start of the new
millennium. This extended rally could be attributed to certain developments
Interest rate cuts
Discontinuation of Bank Cash Schemes
Entry of foreign investors
The initial increase in volumes and investor interest was due to the
liquidity inflow, brought upon by the interest rate cuts and the discontinuation of bank
After breaching the 1500-1600 levels, further ground support became
present in the form of the entry of foreign investors in the market. Their re-entry into
the market was the result of an increase in their comfort zone when the market crossed the
1600 levels. Another possibility is the asset reallocation at the start of every Calendar
year by various fund managers.
Positive developments on the privatization front increased investor
interest in blue chip stocks like PTCL. The recent State Bank actions towards lesser
capital controls also proved as a reassuring step to the foreign investors, who welcome
any structural adjustment programmes aimed at reducing financial imbalances and enhancing
the regulatory and supervisory regimes.
The KSE 100 has successfully breached the 1850 resistance levels. The
trend remains strong. Under these conditions we would not rule out the 2000 levels.
However if the market opens on a weak note, we would not recommend massive liquidation but
rather caution should be exercised with a view to reenter the market at our support level
More Upside Potential
The focus seems to have returned to future prospects and the search for
fundamental value. Consequently, we have seen a significant re-rating of the Energy
sector, up 155% over the last 12 months, and 62% over the last quarter alone. Several
sectors have not performed well, amid the seemingly general investor euphoria, which leads
us to believe there is some steam left in the current rally. Strong domestic buying has
also propelled the market higher along with strong.
We note that only a handful of the sectors have driven the market, led
by Energy stocks. Notable laggards have been Telecoms, Insurance, Banking, and even
Textiles. We conclude that the recovery so far has been a function of investors piling
back into sectors, based on their perception of a return to normal conditions. Looking at
some of the laggards, notably Telecoms, it would appear that investors have not taken
stock of constantly improving fundamentals. Similarly Banks and Insurance companies,
should benefit from low interest rates. Textiles, a previous favorite with investors, is a
surprising laggard, as the sector is enjoying perhaps the best season since the
deregulation of cotton prices in the early 1990s. Accordingly, we expect Telecom and
Banking stocks to lead the way, going forward and recommend investors overweight these
Has the market run out of steam?
We would replysimply, no. Recent market performance indicates
that local investors have realized future prospects are unlikely to be worse than the
present. However, there seems to be little indication that improving fundamentals have
been discounted as yet, as evidenced by Telecoms' lackluster performance.
We think improving economic and political conditions would suggest the
required rate of return for investors should decline. Hence it would be appropriate to
estimate the magnitude of this decline. We begin with the risk-free rate (average 12-month
T-bill rate), which has fallen by a 388 bps in the last year, and is likely to drop a
further 211 bps over the next 12 months. The next step is to determine the reduction in
the required rate of return. We believe that as growth prospects for the economy improve,
it would be logical to assume a decline in equity risk premium, along with the risk-free
First, we assume that the equity risk premium would also decline with
the risk-free rate. The corresponding drop in the required rate of return would yield an
estimated 31% upside potential over the next 12 months. Next, we assume an improvement in
long-term growth estimates as above and assume improving long-term growth yields an
estimate of 107% upside over the next 12 months Although we do not expect the market to
rise over 100% over the next 12 months, we think it is important to estimate the potential
for further upside.
We believe the market has further upside, despite strong performance
over the past 12 months.
However, in light of a dramatic run in the last quarter, a near-term
correction seems likely. Hence we would recommend investors to build positions during any
market weakness, going forward. Foreign investment activity has been limited so far, and
we believe relying improving economic and political conditions is likely to yield a
handsome payoff, as subsequent events substantiate our view.
Based on our outlook for improved economic growth, we favor cyclicals
and other sectors with improving growth potential. Our top picks are Telecoms, Banks, and
Textiles. We expect Telecom and Banking stocks to be the start performers for the year,
and recommend investors to be OVERWEIGHT in both sectors.