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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 30, 2001

The KSE Overview: We are STILL Concerned

The 13 point or 1% rise in the Index over the last week wherein KSE-100 closed at 1366 has not allayed our concerns over potential weakening of the market in the immediate term — i.e. next week, although for the month of July as a whole we feel that the market may consolidate between 1430-1450 levels. The Average Daily Volume (ADV) continues to shrink with last weekís ADV coming out at 48.6mn shares versus previous week's level of 79.80mn shares. The total volume for last week was 244mn, almost 40% down over the previous week's 399mn.

The anemic strength displayed by the market last week was, in our opinion, due mainly to quiet raising of Index heavy scrips just before closing bell rather than any genuine buying interest. We believe this is likely to be the result of fiscal year end closing phenomenon as major players make final adjustments to their investment portfolios before June 30th. As such we feel investors should not bank upon further base building beyond this level next week as both institutions and weak holders are likely to cover their long positions, thus reversing the up trend.

From a technical perspective, the 5-day RSI has moved into neutral territory at 49.15 indicating that some good volume buying is necessary to push the market firmly up at the start of the new fiscal year. The question is where will this buying come from? As we no longer put our hopes in any significant foreign buying in the near term, that leaves us with domestic players. The continued up trend in interest rates implies that fixed income instruments are competing more rigorously with equities as an investment vehicle for institutional investors. As investor horizon has shortened a lot, value plays have yet to kick in and corporate fundamentals still have to become more clear for domestic investors to take a firm view (6-12 months) on the economy and stock market outlook. So where does that leaves us for the next 2-3 weeks.

Our technical analyst tells us that the 14-day RSI has moved close to 40, implying that we are moving towards a slight oversold zone in the intermediate term. The positive point to note is that this is indicative of a possible limit to the downside to around 1325. If, as we expect, the market consolidates between 1430-1450 over the next week or two, it should make a sufficiently stable base from which to move upwards if the news flow triggers positive sentiment. A positive outcome of the Agra Summit in mid July might be such a trigger but lets follow the axiom: "We will believe it when we see it" before taking any serious bets. In our opinion, the near term tactical portfolio management approach warrants a combination of income-growth oriented focus.

As we enter the new fiscal year for many institutional investors or the second half CY01 for those having December year-end financial close, the first step may be to assess where the Index could end up by December 31, 2001. Of course, in order to do this, one would have to make some assumptions. The assumptions that we have made are:

•The Agra Summit is likely to lead to renewal of dialogue and reduction in tension between the two subcontinent neighbors.
•With the budget likely to have IMF acceptance in a general sense, we believe that the probability of Pakistan entering the extended PRGF program by November 2001 is reasonably high.
•Along with the above, we also feel that there is more than an even chance that Pakistan will be able to get a good chunk of its external debt falling due in the new fiscal year, rescheduled by the Paris Club (now called the Pakistan Development Forum). This should suffice to tied over the US$4.1bn external funding gap that we expect to arrange in FY01-02.
•After the assumption of Presidency by the CE, the probability of the present technocrats continuing the management of the economy over the next two years has risen. In our opinion this will mean continuation of economic reforms and the stabilization program through consistent policy stance going forward.

The Insurance Sector: Revisiting Adamjee

The FY02 budget went half way in ameliorating certain structural issues related to taxation in the insurance industry. This is unfortunate, we had hoped that the sector would have been given greater boost and treated in a manner that is commensurate with its importance as a long-term savings vehicle in the economy. This ofcourse relates to life insurance. As far as general insurance is concerned, the current low penetration level is indicative of generally sub-optimal risk management by our corporate sector. And therefore, there is a need that encouragement is provided for the growth and development of this industry for long-term improvement of risk management capabilities.

Budgetary Impact

The latest budget announcement of FY01 is likely to have a neutral effect on the insurance sector, as tax exemption on capital gains is one of the several issues that has been resolved. However, with the latest development insurance companies will be taxed at the same rate on their dividend income as all other companies i.e. @ flat rate of 35% as corporate tax. This brings around a 3% relief from the previous tax structure of 33% corporate tax and 5% additional surcharge.

Insurance companies with large equity portfolios and low priced investment will get the most benefit of capital gains tax exemption. In CY01, however, in the scenario that the case equity market remains depressed many companies may not gain substantial benefit by this measure, Capital gains, in the case of Adamjee Insurance, the biggest insurance company in Pakistan with 38% of the industry premiums, has been volatile in line with the performance of KSE-100 Index.

Insurance Ordinance

The Insurance Ordinance 2000 was promulgated by the end of 2000 which replaced the Insurance Ordinance Act 1963. The salient features of the Ordinance include phased increase in the paid up capital of the life insurance companies to PkR150 million and PkR80million for the non-life insurance companies by December 31, 2004. The Solvency Margin has also been increased from PkR500,000 in the Insurance Act 1938 to a minimum of PkR5million over liabilities or assets of an individual non-life insurance company. In addition, every life insurance company has to keep at least PkR10million as statutory deposit with the central bank, the SBP, compared to PkR3.5million previously.

The Insurance business will now be regulated by the Securities and Exchange Commission of Pakistan (SECP) and not by the Ministry of Commerce through the Department of Controller of Insurance as in the past. However, the policy making powers would still remain with the Ministry. Another development on this front is the establishment of Tribunal and creation of a Commission, office of Insurance Ombudsman and Small Disputes Resolution Committee. The Tribunal will have a civil jurisdiction in case of a claim filed by a policy holder against an insurance company. The Ordinance has also laid down a well-defined criteria for the recruitment of insurance agents, brokers, surveyors, to encourage professionalism within the industry to better protect the interests of the insurees.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

5.31

5.33

0.38

Total Turnover (mn shares)

399.00

245.83

-38.39

Value Traded (US$ mn.)

161.57

214.90

104.44

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

79.80

49.17

-38.39

Avg. Dly T/O (US$ mn)

32.31

42.98

33.01

KSE 100 Index

1353.16

1366.43

0.98

KSE All Share Index

863.28

870.35

0.82

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3456.78

+51.92

1.52%

Hong Kong

Hang Seng

13042.5

+214.71

1.67%

Singapore

Straits Times

1726.5

+18.86

1.10%

Sydney

S&P ASX 200

3490.3

+69.80

2.04%

Tokyo

Nikkei

12969

+289.17

2.28%

.



EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

6058.38

+86.61

1.45%

London

FTSE

5642.5

+4.10

0.07%

Paris

CAC

5225.33

+9.77

1.79%

Dow Jones

Industrial

10502.40

-63.81

 

NASDAQ

Composite

216.54

35.08