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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 June 23, 2001

The KSE Overview: We are Concerned

We are concerned by the behavior of the market since the last week. The sudden sell-off in PSO has apparently caught market players by surprise and we believe that many speculators and investors have been caught off guard as the overall market fell sharply by 2.65% during the week with the index closing on Friday at 1353 versus 1390 on the previous Friday. Despite this, badla rates have shot up sharply from an average of 18.6% in the previous week to first over 30% last week. While market players say that this is more due to lack of funds available to the badla market (as June 30th closing is at hand) rather than actual rise in badla holdings, we are still concerned.

Whether it is the lack of funds or higher badla holdings is not as important as the fact that such a high carry-over rate is not sustainable for more than a clearing or two. Further, nothing than from July a group of sectors will be moving to the new T+3 rolling settlement system, there is a real possibility of another slippage in the market as weak holders are forced to square this position next week. In this context, we would not be surprised to see the market test its support levels next week within risk extending down to 1320 level.

Based on this, we can only reiterate over views (as we stated last week) that while gradual accumulation would be justified for long term investors as the market weakens on the basis of fundamental valuations, for trading oriented investors, long portions should only be taken with tight stop-loss limits and this discipline must involve liquidation of a wrong position otherwise the potential for the loss to rise can quickly buildup in this kind of a market environment.

Amongst the high volume scrips outside of PSO, World Call took a large hit, falling by 6.4% over one week and more than 19% over two weeks. While this was expected, the slippage in Telecard by 6% last week was more in sympathy rather than fundamentals, in our opinion. This can be gauged by the fact that the scrip fell only 2.7% over a two-week period. Also, over a two week period, in relative performance terms MCB, Hubco, Askari and Engro where the small minority of stocks to have out performed the market. MCB and Askari were of course driven by the potential of positive impact of the recently announced tax cuts. Engro and Adamjee came in for selective support also. Going forward, we believe that a defensive posture for the time being means staying away from the likes of Worldcall, Adamjee, Dewan Salman Fibers and ICI. On the other hand market weakness can be used as an accumulation opportunity in MCB, Hubco, PTCL, Telecard and Ibrahim fibers. Fauji also offers very attractive yield play at the moment.

Sector outlook

Textiles/Synthetics

Cotton Prices: Limping Internationally, running ahead domestically

The slowing down of cotton consumption in the US seems to be the governing factor driving international prices of cotton. According to recent newspaper reports, it has cut back on consumption by 1 mln bales, while China produced 2 mln bales of excess cotton this year, which created a supply overhang. This has possibly been the cause of decline in the Cotlook A Index by three cents to 48.05/lb, its lowest point since January 2000. Even more marked was the downturn in New York futures, which declined to their 15 year lows recently.

Contrary to the global price drop, greater acreage, increasing domestic cotton consumption, weaker rupee and greater acreage have supported local cotton prices that have remained firm at 2300-2500 levels.

Low water reliance: an assurance in reaching crop target

Despite drought conditions, the cotton crop has escaped lightly so far this sowing season as its low reliance on water has led growers to switchover to cotton rather than continue with the tradition of rice and cane planting. The SBP's third quarterly report has set the cotton production target at 10.7mn bales. On an annual basis, domestic cotton consumption is expected to range between 9.5-10.5 mln bales, and since the local cotton crop may be insufficient to meet demand, its price is expected to remain firm. As a result, preference for PSF-based cotton products is likely to go up.

What has the twin sector PSF been upto all this time?

Global PSF prices edged up a little in May but domestic prices dropped precipitously due to a price war initiated by one of the largest PSF manufacturers. This player, Dewan Salman Fibres (DSF) had undertaken massive debt to acquire presently the second largest PSF producer. With debt servicing creating the need for cash flow generation, DSF found itself facing the threat of loss in market share as Ibrahim Fibres Limited (IFL) started test selling its product outside its Group concerns in preparation of the 200% percent capacity increase due to come online by 2QFY02. This, in our opinion, forced the largest player to break away from the mutually agreed pricing structure set at the beginning of every month and instead fixed at a large 5% discount at PkR62/kg. As a result, the slight improvement in primary margins witnessed in April/May is likely to be reversed in June.

At the same time the demand side, after reaching its cyclical peak in January, has also settled at a slightly lower level. As a result, the expected imports of PSF have not materialized in this quarter. We believe, however, that this is only a seasonal situation and should normalize in 3QFY01, as high cotton prices are continuing to lead to substitution of pure cotton textiles by blended yarn and fabrics.

Question: Any gains in store for FY01?

In a pre-budget move at the end of May, the Central Board of Revenue withdrew the exemption of duties and taxes on the import of PSF and PTA used mainly in the manufacture of textiles for export markets. This was done in order to provide relief to domestic PSF and PTA manufacturers from cheap imports from the Far East.

The FY02 Federal Budget further lowered duties on a host of raw materials used by the textile sector. Import duties on woollen and nylon yarn have been slashed from 35% to 10% and 20% respectively, in order to contain domestic producers' costs. Similarly, import duties on viscose yarn have been reduced from 10% to 5% while duties on dyes and related chemicals have been brought down to a 10-20% range.

Answer: Squinting hard, but no

In our view, the new regulatory structure should be neutralized for the domestic industry in the medium term.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

5.49

5.31

-3.28

Total Turnover (mn shares)

338.98

399.00

17.71

Value Traded (US$ mn.)

161.57

330.32

104.44

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

67.80

79.80

17.71

Avg. Dly T/O (US$ mn)

32.31

66.06

104.44

KSE 100 Index

1390.06

1353.16

-2.65

KSE All Share Index

882.83

863.28

-2.21

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3381.76

-23.88

-0.70%

Singapore

Straits Times

1716.88

+30.95

1.84%

Sydney

S&P ASX 200

3428.3

+17.50

0.51 %

Taipei

Weighted

4904.34

-80.54

-1.62%

Tokyo

Nikkei

13044.6

+82.18

0.63%

.



EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

5941.77

+15.39

0.26%

London

FTSE

5665.7

+24.30

0.43%

Paris

CAC

5183.67

+48.70

0.95%

Dow Jones

Industrial

10604.59

-110.84

 

NASDAQ

Composite

2034.84

-23.92