Updated on Apr 28, 2001

The KSE Overview: Giving up Gains

The KSE-100 Index, having failed to breach upwards of the 1400 psychological resistance level gave up all its gains of the previous week and slipped down 23 points to close at 1364 on Friday. Turnover also tumbled from 687mn shares from previous week to 502mn shares last week. The week before it was 497mn. The top five volume leaders all showed price declines of a small percentage. The exception being MCB, which closed up for the week. It was generally a quiet week except that in the latter part a few players and institutions began building up PSO and then when the momentum could not be maintained, they sold off in a hurry. Hubco remained surrounded by rumors of the court cases until it was finally confirmed on Tuesday that the government had withdrawn the cases. The market showed some stability on Thursday due to this but typically, weak holders withdrew prior to weekend on Friday and let the Index slip down.

It is clear that serious investors are building their time on the sideline and speculators do not have the stomach to absorb the large supplies of paper that has come into the market after foreign selling.

Going forward, the Index's next small support is at 1353. For the pessimists, risk still extends to 1333. For the optimists, with weak holders letting go of their holdings on Friday, downside is more limited. Suffice it to say that the market does not have a clear direction in the intermediate term. So when or what will give it direction?

In our view there are potentially two triggers for any near term bullish direction. The first is any near term bullish direction. The first is any confirmed news regarding interim dividend payment from Hubco. Late on Friday a rumor did a round in the market that Hubco may be holding a board meeting in Turkey in mid May where possibly a dividend announcement could be made. It remains to see how accurate this 'rumor' is.

Second is, any fresh news regarding movement on PTCL's privatization. We believe that there is increasing possibility of serious potential bidders being lined up between 2 to 3 different consortium possibly. As we move through this quarter, greater clarity should start gelling on this front. If correct, then a slow rerating in PTCL may be in the offing but it would test investor's patience.

We therefore believe that the big game still remains in PTCL and Hubco in this market over the newt 4-6 weeks. MCB is nearing its annual results season and is likely to maintain its firm trend, although over PkR27 it is likely to become susceptible to profit taking. With badla rates continuing at lower levels, there does not appear to be immediate threat of any major sell-off in the market. Our overall assessment continues to be that of a range bound market between 1350-1500 with short term overshooting on the downside a possibility, but which is likely to be corrected quickly at low 1300 levels as the valuation aspect kicks in, both in terms of dividend yield as well as yield gap.

Pakistan Textile Sector: The WTO Imperative

Current Status

Since quota facilities would phase out for the developing countries by the end of 2004, Pakistan has some serious shaping up to do as a lot banks on the future of a sector, which constitutes 65% of total domestic exports, contributes 30.4% to industrial value addition, accounts for 38.2% of industrial employment, 8.5% of total GDP and 31% of total investment. Pakistan, being the 2nd largest cotton grower in the world, is placed 8th in ranking in terms of exports.

If these historic growth rates are extrapolated forward, Pakistan may be expected to reach a textile export figure of $7,440mn by 2005, and push up its ranking to number 7. Garments (19%) and made-ups (23%) constitute about 42% of Pakistan's textile earnings.

The Potential

Despite significant foreign exchange earnings brought in by this sector, there exists sizeable potential for future growth, as Pakistan textiles' global trade has only 2% market share of the total global textile exports.

With the exception of Africa and certain parts of Europe, the world's consumption of textiles continues to steadily increase notwithstanding the cyclical business cycle ups and downs, such as the current US slowdown. Further, the significant 5.3% growth from "other countries" head indicates a possible stretch in market size.

What does WTO mean for Pakistan's Textiles?

- A challenge as well as an opportunity

Quotas have been in place for over thirty years now. Quota allocation has always been determined via bilateral negotiations, and is liable for adjustment on the basis of past performance and production capacities of the exporting countries.

The Multi Fiber Arrangement (MFA) phase-out will come into effect by 2005, after which the global textile playing field should become devoid of quantity restrictions and import barriers will be lower. The removal of quota constraints along with zero-rated duty imports will open the doors for value-based competition, and a much more freer trade of textile products is envisioned thereafter. It is not too hard to predict that countries, especially developing ones, lacking in technology, production and market expertise, and other related areas are likely to be placed at a distinct unfair disadvantage initially. They are likely to be not losers as they will be exposed to the threat of losing their market share to better value driven offerings by competitive sellers.

At the same time, seeing the record of the importing countries, it would not surprise us that once the quota regime ends, other non-tariff barriers may come into force. The key issues then would be related to non-tariff trade barriers and these need to be addressed, as present ambiguity may prove to be detrimental to the domestic industry. Pakistan is also expected to face even more fierce competition from producers like China, Bangladesh, India, Indonesia, Thailand and Sri Lanka, to name just a few in Asia alone.

Other barriers may be in the form of preferential trade within major trade pact groups, such as the EU and NAFTA. Yet others include use of special standards such as the ISO — 9000, etc. And then there are always things such as the child labour issue, hygiene and environment related barriers that can be used to curtail imports from specific countries.

For the Pakistan textile industry, we believe that while it should keep abreast of new developments on the tariff front and also to actively participate in the industry debate in order to give direction to new trade arrangements post 2005, what is really important is to make the industry competitive and responsive to the market demand. This means focusing on value addition; raising technical skills as well as the productivity of the domestic work force; spending on research & development especially in the areas of dying and finishing technology as well as designs and textures; rapidly opening new markets to diversify export destinations; alliances & joint ventures with major textile product importers in key importing countries; as well as major changes and improvements in the management practices of the Pakistan textile industry. In our opinion, these are the real drivers of long term success and areas where the textile industry can get cracking right away, rather than sitting and lamenting about the problems facing them due to the government, recession and a host of challenges, which are a reality and have to be negotiated in any case.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US $ bn)	5.67	5.59	-1.41
Total Turnover (mn shares)	687.19	501.90	-26.96
Value Traded (US$ mn.)	278.17	295.21	6.13
No. of Trading Sessions	5	5
Avg. Dly T/O (mn. shares)	137.44	100.38	-26.96
Avg. Dly T/O (US$ mn)	55.63	59.04	6.13
KSE 100 Index	1387.73	1364.44	-1.68
KSE All Share Index	877.11	865.37	-1.33

.Source: KSE, MSCI, KASB

ASIA PACIFIC & AUSTRALIA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Bombay BSE 3422.76 -134.43 -3.78% Hong Kong Hang Seng 13386.04 +92.93 0.70% Singapore Straits Times 1686.45 +16.38 0.98% Sydney S&P ASX 200 3293.9 -18.10 -0.55% Tokyo Nikkei 13934.32 -38.71 -0.28%

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