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THE KASB REVIEW
STOCK MARKET AT A GLANCE

  1. FINEX WEEK
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  3. STOCK MARKET AT A GLANCE

The KSE Overview: Market fumbling to find a bottom

Updated on Nov 20, 2000

The market fell 3.6% from 1462.33 to 1409.27 for the week ended November 17, 2000 confirming the bears' victory against the bulls in this round. Repeated attempts by the bulls to keep the KSE - 100 Index near the psychologically important 1450 level failed as the bears challenged each and every attempt. Average daily volume for the week was 35% lower at 433.24 mn shares versus 667.04mn shares in the previous week.

Several factors are responsible for this large slump in the market a slump that began in October when the Index breached through its three-year up-trend line at around the 1580 level. The market is a forward-looking indicator incorporating investor expectations about future health of the corporate sector, which in turn is driven by macro-economic, political, regulatory and a host of other influencing factors. This behavior of the market is, on the one hand, a reflection of the disappointment of investors at the lack of progress on the economic restructuring front, despite government claims to the contrary and loss of policy makers' credibility on failing to fulfil expectations they themselves created regarding the Hubco - Wapda dispute resolution. On the other hand, the market is also discounting the fact that perhaps the textile sectors recovery may have peaked early due to the sharp rise in cotton prices this year compared to a year ago.

In fact, the saving grace for market valuations in FY00 has been the textile sector. Initial estimates indicate that it was only the textile sectors massive jump in earnings that will enable the KSE 100 Index to show a 9-10% EPS growth this year. Even then, our estimate of a market PER of 10X FY00 earnings indicates that compared to the Asia-Pacific region, the Pakistan market is not cheap. As an illustration, consider that in local currency terms, Pakistan was up 6% for the year up to end October, while most other Asian markets (with the exception of Shanghai - A shares, which have restricted trading anyway) were significantly down, as shown by the table below. Even after the recent drop in KSE, Pakistan remains ahead in relative performance terms. That is why the Pakistan market has, perversely, ended up being on the expensive side one reason that foreign interest is absent even though the country risk factor is likely to improve with the now highly likely approval of IMF Standby funding facility.

While the above noted fundamental aspects have been driving the market lower, technical and speculative factors have now accentuated the decline, bringing the Index dangerously close to both its important psychological support of 1400 and the more critically important technical support level of 1370. If the current bear momentum accelerates for any reason, the next major support is way down at 1187 - almost 16% lower then last week's closing level of 1409.

The key technical / speculative driver in the current volatile behavior of the market has been PSO. With expectations being driven both ways regarding its FY00 results, which were announced on November 13, the scrip gyrated between a high of Rs 170 (before adjustment for Rs 7.00 cash dividend) and a low of Rs148. In the event, the results disappointed bulls who had built up long positions in the hope of a bonus payout. Short sellers promptly moved in to hammer down the stock, while the bulls seem to have been caught off guard.. Just as the latter were attempting to gradually edge up the stock, a bout of foreign selling mostly in PTCL and Hubco, but also in PSO took the floor away from beneath the bulls' feet. An estimated Rs 0.75 billion to Rs 1.0 billion worth of selling by foreign funds has occurred last two weeks. This happened as international fund managers sought, in their usual routine manner, to raise cash or readjust Pakistan's weight in their portfolios before going off on winter / Christmas holidays in the coming few weeks. With many local institutions already sitting at higher levels and therefore unwilling to take fresh positions just before their financial year-end in December, even this amount proved too much for the market to digest in one go. There were even rumours on late Friday afternoon.

So where do we go from here?

Although technicals indicate the need for extreme caution in the short term, there are reasons to believe that for value investors with at least 3 to 6 months holding horizon, opportunities will present themselves for gradual accumulation in selected fundamentally strong scrips, if the market weakens further.

First, the fundamentals. After an earnings growth of 9% - 11% in FY00, we are forecasting an earnings growth of 20% - 22% in FY01 for the KSE - 100 Index. That puts FY01 PER for the market at just over 8X. We feel that these valuation levels are respectable for investors who are looking for "growth at a reasonable price". More important, several major blue chips are now reaching valuation levels where they are trading at a significant discount to the market as well as there historic valuation trends, although significant fundamental changes to their earnings dynamics are either not apparent or have already been discounted in prices. Thus any sharp downslide in the market would, in our view, provide a good opportunity to accumulate such stocks.

Our medium term scenario indicates that the rupee is likely to stay stable within 56-57.50 range, forex reserves should remain within manageable range and there is likelihood of progress on the debt-rescheduling front. Further, if the government succeeds in containing FY01 budget deficit within 5.2% to 5.4% of GDP, we believe that Pakistan stands a more than an even chance of getting into the longer term PRGF program of the IMF. Thus, our view is that the country risk is likely to gradually reduce going into IQ01. As this occurs, there is scope for higher allocation to Pakistan by foreign funds for 2001, given the out performance exhibited by this market in 2000. Thus, on fundamentals, we feel that market weakness due to technical factors can be used as an opportunity by investors with an investment horizon of six months or more.

At the same time, entry timing has now become crucial. With the market at a potential inflection point of either turning around above 1370 or breaching it and falling further, any entry strategy needs to be timed carefully. Fridays "Badla" rate on PSO had risen as high as over 20%, indicating that it may take some time to digest the holding and that weak holder level might be above normal. Thus it would be prudent for investors to hold back at the beginning of the week and first allow the market to find some direction before moving in. Technically, entry should be considered if the market closes above 1438 for the week. On the other hand, short-term traders need to operate with very tight stop losses otherwise their risk being bowled out for a duck.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap(US $ bn)

6.84

6.53

-4.53

KSE 100 Index

1462.33

1409.27

-3.63

Total Turnover (mn shares)

433.24

667.04

53.97

Value Traded (US$ mn.)

474.97

578.29

21.75

No. of Trading Sessions

4

5

 

Avg. Dly T/O (mn. shares)

108.31

133.41

23.17

Avg. Dly T/O (US$ mn)

118.74

115.66

-2.60

MSCI Pakistan Index:

     

Pak Rs.

100.88

96.31

-4.54

US $

46.29

43.64

-5.71

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3905.84

+3.94

0.1%

Hong Kong

Hang Seng

15180.85

-117.50

-0.77%

Singapore

Straits Times

1953.54

-28.80

-1.45%

Sydney

S&P ASX 200

3329.1

+26.60

0.81%

Tokyo

Nikkei

14544.3

-42.73

-0.29%

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EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

6752.29

-89.82

-1.31%

London

FTSE

6440.1

+9.70

0.15%

Paris

CAC

6161.92

- 121.14

- 1.93%

Dow Jones

Industrial

10629.87

-26.16

 

NASDAQ

Composite

3027.19

-4.69