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THE KASB REVIEW
STOCK MARKET AT A GLANCE

  1. FINEX WEEK
  2. STOCK WATCH
  3. STOCK MARKET AT A GLANCE

Updated on May 26, 2001

The KSE Overview: If you were to look beyond the here and now

The KSE 100 Index closed at 1349.61 down a marginal 1% over last week's close of 1362.01. The week before, the market had been at 1346 so basically over a two-week period, it has gone up 1% and has gone down 1%. That's our market!

Attempted Rationale?

We have tried to look for reasons for this anemic behavior of the market and fundamentals aside, we have found some anecdotal evidence of short-term shift in investor interest out of equities. Over the last six to eight weeks, the gold price has seen a consistent firming trend driven by a surprisingly strong 5% growth in demand from 27 largest gold consuming countries in IQ01.

First, there appears to have been a renewal of interest in gold. Although in recent years, gold has not been a major competing asset class to equities due to fairly low inflation rates; historically gold prices and equity values have been inversely correlated. What may have happened over the last month or so, is that the speculative money have become shy of the local stock market in view of T+3 concerns. Its possible that a portion of this found its way into playing the gold because of its sudden strength.

Second, the rupee has come under pressure both due to seasonal regular corporate demand as well as because of SBP buying to gradually buildup foreign reserves by June 30. Here too, the forex and equity markets have historically been in direct competition as far as speculative money is concerned. Thus, the steep slippage of the rupee, particularly outside the interbank market has shifted a lot of short-term traders' attention towards playing the exchange rate rather than the equities, leaving the stock market technically meandering.

Third, there are indications of slight life in the real estate sector after almost 18 months of continuous depression. Land prices have shown marginal rises indicating potential rise in interest in this asset class.

Finally, with the textile half-year reporting season now fully underway, the high cotton prices in 1H01 are clearly seen negatively impacting profitability. This is on top of gradual buildup in pressure on exporters as the weakening US demand (now to some extent European and Far East demand also) takes its toll both on export volumes and pricing structure. The result has been a drop in IH01 NPAT by between 30-50% from the profit levels of 1H00. As a representative of the stronger companies, Nishat Mills Limited's profitability has declined by almost 38%. Gadoon Textiles, another well-managed company, has also shown a YoY decline in 1H01 profitability by almost 34%. As textile stocks allow for both retail and speculative interest near and during reporting season, poor outlook here has dampened this market segment with investor sentiment negatively impacted overall.

Potential Triggers Going Forward

Going forward, we feel that with the gold price rises now reversing due to reports of Russian gold sales, there may be some hot money released from that sector. However, for the equity market as a whole to move forward on a positive footing we need a trigger. That trigger might be the budget and its impact on specific sectors and stocks. For example, there is talk of a possible reduction in commercial banks' tax rate by 2-4% in the FY01-02 federal budget. That is positive for the banking sector. Then there are signals from Islamabad that development expenditure will be raised, after three years of continuous decline note the emphasis on job creation via raising construction activity and talk of medium sized dam projects. If actualized, that may give a much-needed shot in the arm to the cement, ceramics and other component / industrial sectors. On the other hand, there are expectations that import duties may be reduced on a host of goods. This may be negative for certain engineering / electrical and consumer good industries.

Technically, the market is likely to remain range bound in the immediate term with downside risk appearing to extend down to low 1300 levels. However, as we have seen throughout the last few months, the market depicts a strong rebound from 1300 levels. We attribute this to the very attractive valuations at the lower market levels where both average dividend yield as well as the earnings yield gap rise above their normal ranges.

As the 200 DMA and 40DMA indicates, clear bullish signal, even for the short term, is not likely until the index penetrates upwards through its 40DMA in the first instance. And that, in our opinion would require a trigger.

The next question is, if a bullish trigger occurs, which scrips are likely to benefit the most, at least in the short run?

With Nishat Group companies poised to declare HY01 results next week there will be activity in MCB and Nishat Chunian that, might spill into other banking and textile sector counters. MCB has fallen by almost 8% over the last two weeks, indicating that market expectations are for a mediocre earnings growth last year (FY00) and / or that dividend expectations are also low. But it could also be that smart money has deliberately pushed down this counter in the hope of picking it up quickly if there is a positive earnings surprise and thus make a rupee or two.

In our view, value investors should look at FY01 earnings, which in our opinion are likely to be positively impacted by both stronger loan growth this year as well as the possibility of a cut in income tax rates for banks. We are similarly more bullish on Nishat Mills and Ibrahim Fibers based on better 1H01 results than our original expectations. We remain concerned about ICI and Dewan Salman's ability to outperform the market due to weakened fundamentals. In our opinion, fertilizer sector has potential to outperform over the next 12 months (but note not next three months as this quarter's earnings are likely to come out weak). However, there is uncertainty regarding Fertilizer policy so we remain Neutral here. We are also Neutral on the Oil Marketing Companies but favour Shell over PSO in the longer term as the latter still has a lot of restructuring to carry out and that may entail costs. The gas sector is, in our opinion an attractive longer-term play but in the intermediate term may tax investors' patience. Finally, we remain overweight the telecom sector and in fact, this is our favourite sector for calendar year 2001 in terms of potential out-performance.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

5.54

5.42

-2.17

Total Turnover (mn shares)

414.20

307.56

-25.75

Value Traded (US$ mn.)

259.28

253.02

-2.41

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

82.84

61.51

-25.75

Avg. Dly T/O (US$ mn)

51.86

50.60

-2.41

KSE 100 Index

1362.41

1349.61

-0.93

KSE All Share Index

865.47

858.40

-0.81

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3659.81

-23.39

-0.64%

Hong Kong

Hang Seng

13753.99

-56.61

-0.41%

Singapore

Straits Times

1687.75

-4.63

-0.27%

Sydney

S&P ASX 200

3426.1

+10.10

0.30%

Tokyo

Nikkei

13765.92

-129.87

-0.93%

.



EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

6223.57

-55.33

-0.88%

London

FTSE

5889.8

-26.10

-0.44%

Paris

CAC

5581.94

-74.53

-1.32%

Dow Jones

Industrial

11005.37

-117.05

 

NASDAQ

Composite

2251.03

-30.99