Updated on July 14, 2001

Khadim Ali Shah Bukhari & Co. Ltd.

The KSE Overview: Has Bottoming Out Started?

Market activity remained generally dull throughout last week with the KSE-100 Index ranging between 1297.91 and 1319.80. The index broke downwards of the psychological level of 1300 on Tuesday and dropped to an intraday low of 1287 on Wednesday, but quickly recovered the same day. It closed up at 1311.76 points with an increase of over 31% in trading volumes. However, intermittent foreign selling kept PTCL and Hubco subdued and as a result, led to weak market sentiments. The remainder of the week saw the index hovering around 1311-1320 levels, hinting towards a potential stabilization just above the psychological support level of 1300.

The KSE-100 Index has experienced continued volatility over the last eight weeks, reaching a low of 1306. Weekly trading volume has also remained fairly close to around 300mn shares per week, although early in this period it did cross 500mn shares for the week ending June 08, 2001. Sentiment in the post-budget period has continued to remain on the weak side. The bearish sentiment was further fueled by NAB's investigation of two brokerage houses in Prudential Bank case. While rumors were that a further drop to the support level of 1280 was probable, the market managed to prove otherwise, with trading volumes increasing by around 5% to 308mn shares. We believe that events such as the IMF approval of the third tranche of US$133mn of the Stand-by Arrangement facility (US$596mn) and the upcoming talks between Pakistan and India helped keep the negative sentiments at bay at the close of last week.

The question of future direction of the Index is still open. In our opinion, certain events (highlighted below) are likely to play an important role in deciding the future direction of the market.

a) Pakistan — India Summit to resolve various political issues.
b) Official visit of Finance Minister Shaukat Aziz Washington D.C. in October 2001 to attend the annual meeting of the World Bank. Pakistan and IMF are meeting to start the first round of talks for medium term Poverty Reduction and Growth Facility (PRGF).

We believe that the above events — especially the Summit talks next week, could prove to be the trigger for the market. Pakistan's response so far has been very mature and non-committal but cautiously optimistic. We believe that any reciprocal gesture by the Indian government would be welcomed and could result in a turnaround in the market sentiments.

The meeting of Pakistan's Finance Minister with the IMF mission for PRGF in October 2001 is an important confidence-building event itself for the market. Pakistan is trying to qualify for the medium term loan facility and associated long term external debt rescheduling. A longer maturity ladder would give Pakistan enough time in instituting its structural reforms in place and thus enable it to service its debt more smoothly in the future. The approval of PRGF by the International lenders would thus result in lower country risk for Pakistan, going forward.

Sector Review: Agriculture

It is instructive to go back to basics and assess the ground realities on a periodic basis. In this context we are devoting this weekly to the Agriculture Sector in Pakistan to briefly provide an overview, and comment on intermediate term outlook for this critically important sector of the economy.

As a famous saying goes "there is no life without a plant", so it is with the place that agriculture holds for Pakistan. Agricultural output directly accounts for 25% of the country's GDP and has a high positive correlation (R2=0.81) with it. However, through its impact on a host of other industries the real influence of agriculture on the economy is much larger, in our opinion. Furthermore, the sector is also a major source of export earnings including that from cash crops (eg rice and cotton) and of course textiles. It is therefore important for investors to take the pulse of this sector from time to time as it may provide important clues for future health of other industries including Textiles, PSF, Cement and Building materials, FMCG's, etc and also for overall economic outlook.

The last point is brought home aptly by the fact the sharp decline in agri output by 2.5% in FY01 due to severe water shortage, badly stunted overall GDP growth which was limited to 2.55% despite 8% growth in large scale manufacturing. Further, according to government sources, the problems with water shortage caused an estimated loss of PkR95billion. Credit disbursement to the sector also depicted declined by 8% to PkR40.89billion from PkR43.684billion in the previous year.

Currently, with a geographic area of 196.7 million acres, Pakistan only utilizes 25% land for cultivation. Of course a huge portion of land is not cultivable due to geographic or climatic reasons. Another significant portion is taken up by forestry and grazing. At the same time, about 56.3 tonnes per hector is the current yield against the potential of 186.1 tonnes per hector for our major cash and food crops according to agricultural experts. This implies there is significant potential for growth in not just the sector itself but also other sectors related to it, if policy emphasis is made effective.

There is thus a growing realization that to achieve higher GDP growth rate, productivity of Agriculture Sector has to be increased. For this purpose the government is providing support by attempting to contain input costs, enhancing farmers' credit limit and increasing the support prices of the major crops, albeit gradually. The Food and Agriculture Ministry has also embarked on educating farmers about the usage of appropriate quantity and quality and mix of agrochemicals, which is critically important to optimize yields. This year the GoP has enhanced farmers' credit limit from PkR40 billion to PkR60 billion, an increase of almost 50%.

The potential of agricultural productivity boosting our main export engine — textiles — is simply huge. Although not really comparable, China's example in this area should open our economic planners eyes to this aspect. According to reports, China's textile exports were a mere US$3.2 billion in 1985. That is only 16 years ago. By 1990 — i.e. within five years, they increased to US$7.0 billion — i.e. doubled. By 1997 these sky rocketed to over US$40 billion and in 2000, total cotton and textile exports of China were almost US$66 billion. This represents a compounded annual growth rate (CAGR) of over 22% for a 15-year period. If our planners and industrialists achieve only 50% of this in US$ terms, in 5-7 years, our export picture would be dramatically different.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US $ bn)	5.10	5.15	0.98
Total Turnover (mn shares)	294.23	308.87	4.97
Value Traded (US$ mn.)	155.40	230.93	48.60
No. of Trading Sessions	4	5	.
Avg. Dly T/O (mn. shares)	73.56	61.77	-16.02
Avg. Dly T/O (US$ mn)	38.85	46.19	18.88
KSE 100 Index	1306.29	1312.10	0.44
KSE All Share Index	836.68	839.90	0.38

.Source: KSE, MSCI, KASB

ASIA PACIFIC & AUSTRALIA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Bombay BSE 3434.09 +57.88 1.71% Hong Kong Hang Seng 12660.2 +132.30 1.06% Singapore Straits Times 1672.81 +11.42 0.69% Sydney S&P ASX 200 3392.6 +14.60 0.43% Tokyo Nikkei 12408 +402.84 3.36%

.

EUROPE & UNITED STATE OF AMERICA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Frankfurt DAX 5882.4 +80.60 1.39% London FTSE 5469.1 +77.20 1.43% Paris CAC 4979.34 +64.66 1.32 Dow Jones Industrial 10539.06 60.07   NASDAQ Composite 2084.79 9.05