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THE KASB REVIEW
STOCK MARKET AT A GLANCE

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

The KSE Overview: - Blame it on the ...... SBP?

Updated on Jan 15, 2001

As always, it all boils down to the basic question of risk and return. For a given amount of risk, how much return does an investor require to invest in equities or, put differently, for a given level of return how much risk is the investor willing to bear.

The behavior of the stock market certainly suggests that the risk tolerance of investors remain low for the moment. It took only about two weeks of tight money market conditions to manifest itself as a 'bearish shadow' over the stock market. Despite all that is said about the low level of relationship between different segments of capital markets in Pakistan, due to their relatively undeveloped nature, we believe that the stock market still provides a good signaling mechanism for capital allocation in the economy. This is in spite of many inefficiencies and lack of a strong institutional infrastructure that our capital markets are beset with. The return in the money markets has been rising and the fear of T+3 Settlement System (which by the way, in our opinion, is likely to a good thing over the longer term) is raising the risk factor in the eyes of investors not used to it. It is, in our view, only a fear of the unknown, but even that is captured into the market prices and simply reflects investor sentiment.

So what is the market telling us?

We believe that the 4.86% decline in the KSE- 100 index to 1470 last week from 1546 the week before was overdue. We had been cautioning investors since Dec 23rd, 2000 that a correction was becoming a serious possibility as we felt that short term players were pushing the major blue chips into overbought territory. While we still continue to maintain a full calendar 2001 year end target of 1750, we feel it necessary for the market to consolidate in the 1300-1400 range for a while to fully absorb the year end sell off by domestic and foreign institutional investors.

In the event, we feel that weak-holders ploughed into the market in the new year euphoria and built up positions without taking into consideration that financing costs were rising. After the near catastrophe in the money markets on December 31 when some surplus liquidity banks' treasurers were summoned from their homes to lend to deficit liquidity banks, it should have been clear to all and sundry how the first few weeks of the new year were going to pan out. But throwing caution into the wind, weak holders jumped into the market like bulls in achina shop and dragged smaller retail players with them. As always, smart money used this euphoria to quiet offload its shares with rumour mills running at full steam- near term privatization of PTCL, high bonus and cash dividends from a few blue chips, etc.

This firmness of the market allowed some long holders to begin clearing up their portfolios and to put the nail in the coffin a bout of foreign selling also came through.

In the meanwhile, inter bank rates remained high due to tight money market conditions and the plight there was revealed with the extremely poor response to SBP's latest auction. With banks already heavy on the lending side due to seasonal factors, funding for stock market operations remained dry. For want of funding, badla rates moved well beyond the upper range of 17- 18% and into the dangerous territory of 23-24%. The correction was bound to happen and it did

Now What ?

Now investors are again left asking what to look forward to Our response is: "cool it!". We had recommended building up cash positions for just such an eventuality If, as we expect, the market slips down below 1450 levels, gradual accumulation in fundamentally sound scrips should be commenced. We had presented a selection of our favorite scrips for intermediate term investment horizon. We continue to recommend that investor do not become excited at this stage.

For both fresh money buys as well as those who are invested at higher prices, the entry levels should be chosen carefully.

It should be noted however, that poor relative performance in the past does not automatically imply out performance in the future. Some stocks shown below have under performed because of weakening fundamentals. Some others have outperformed due to their defensive qualities and a positive change in sector outlook. A case in point for the latter scenario are the two leading fertilizer stocks though we feel that in the short term they have already moved up too rapidly. Thus these stocks may no longer provide significant medium term out performance.

Returning to the question now what?, our sector preferences from a fundamental 12-month investment perspective are as under:

Sector outlook

Synthetics: Ibrahim Fibers - distancing itself from the pack!

With the financial year closed for most of synthetic fiber producers (except ICI) it is useful for investors to assess how the domestic synthetic industry is ranked for 2000. We have used actual results where available and used our forecasts for Ibrahim Fibers and Dewan Salman Fibers to analyze the sector performance.

Looking at the sector as a whole, and using our estimates for FY00 for Ibrahim Fibers, Dewan Salman and ICI Pakistan's PSF division, the first thing to note is robust growth in sales. The synthetic sector is likely to have posted a 24% growth in sales revenue, more important gross profit shot up by over 46% with gross margins expanding from 14.2% in FY99 to over 16.8% in FY00.

Both higher volumes and prices were responsible for this stellar performance. With domestic demand continuing to remain strong, most synthetic units ran at or near full capacity during FY00. This allowed domestic producers to enjoy pricing power, which translated into higher margins. Similarly, operating profit margins widened to 14% in FY00 from 11.1% in FY99.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

6.64

6.35

-4.37

KSE 100 Index

1545.90

1470.73

-4.86

Total Turnover (mn shares)

1028.16

806.74

-21.54

Value Traded (US$ mn.)

526.73

446.87

-15.16

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

205.63

161.35

-21.54

Avg. Dly T/O (US$ mn)

105.35

89.37

-15.16

MSCI Pakistan Index:

     

Pak Rs.

102.48

99.50

-2.91

US $

44.62

43.63

-2.22

.Source: KSE, MSCI, KASB



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