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Updated on Sep 15, 2001

The KSE - Overview: You are in the middle, so what are you going to do about it?

The market moves on macro elements

It has been a trend with the Pakistani equity markets to show the most marked movements on the basis of a political development, almost always without a full understanding of the situation. That is why during periods of political turmoil, like the government about to kicked out of power, the market usually falls like a ton of bricks, while the installation of a new government has the market soaring. This has been the case in the aftermath of the terrorist attacks in New York and Washington. But we argue that the doomsday scenario that the market seems to be pricing in is not likely to come about. We do feel that the country political risk did heighten following the attacks, but the sheer panic which saw the market fall over a 100 points is not taking into account several factors.

Our Technical feel

KSE-100 Index crashed almost 116 points within three days after the panic selling in the stock exchange. It has breached all its major support levels for the intermediate term indicating further weakness, where the Index can potentially breach 1100 levels in coming few weeks. However, due to the sharp fall, an upward correction may be expected in the near term leading the Index to climb 10 - 20 points.

Currently, the index is trading in its oversold zone with 14-days RSI at 20 minimizing downside risk in the immediate term, which extend to 1120 levels. At this point in time, we advise short term investors to enter the market with tight stop losses in few scrips which have fallen sharply and have minimum down side risk.

What should the Pakistani investor do?

On the morning after the attack we identified in our Morning Shout and a later mailing of our defensive stock picks which would have allowed domestic investors to ride out the downturn in the market, which has seen it lose almost 100 points since the attacks. We could to believe that investors should heavily weight their portfolios towards those stocks, and fixed income instruments.

The defensive stocks like PTCL, Fauji Fertilizer, etc. will ensure that some liquidity via dividend stream is available to the investors. Taking the case of PTCL, it offers an approximate annualized yield of 40%+ for investors who buy into it at present, there is really no other asset which offers similar returns in the range of readily available investment instruments. While we can assume that the SBP will cut rates further in the near term horizon as the US$ weakens and the SBP attempts to keep investment afloat after a considerable rise in the country's political risk perception. Hence fixed income investment instruments offer a potential tax free capital gain.

On the basis of information that we do have, we feel that the GoP is likely to extend full cooperation to the US as the greatest benefits will accrue to it from that decision. In that scenario, we feel that political risk is likely to be heightened substantially for the next 4-5 months, but the market will gradually start re-rate as "good news" in terms of sanctions and loans disbursements start flowing in.

We feel that there is further downside risk and this is substantiated by rumours that several brokers on the exchange are in trouble. But we also feel that this risk is limited as the SECP has adopted a very proactive approach to protect the market

Our recommendation for equity investments: buy on the way down. Though it may seem callous, we think Lord Rothschild said it best, "The time to invest is when there is blood on the streets."

Automobile Sector: Rendezvous with the WTO

World Trade Organization

The World Trade Organization (WTO) has more than 140 members, accounting for over 90% of the world trade. With such substantial share attributed to the body, one wonders why there was uproar in Seattle in 1999 staged by over 50,000 demonstrators? The WTO's ideology originates from the free-market model that encourages trade activities on a global platform with ideally no government intervention. The demonstration against the WTO summit criticized the free-market model and stressed that it was based on pure economic fundamentals where every situation that is assumed is apparently perfect. Therefore, practical application would not provide the desired results and only the affluent segment of the trader community will gain compared to the 'not so affluent' segment that will lose.

With the WTO agreement gaining popularity in most of the developed countries, the developing countries as usual appreciated the ideology and most of them made an agreement to comply with the norms. Countries like Pakistan, which fall under the developing country category, were given a transition period of five years from 1995 to 2000, to comply with the Trade Related Investment Activities (IRIMs) before the beginning of free trade in 2005. The TRIMs agreement provides for disciplines on measures in trade in goods that favor domestic goods over imported, or establish quantitative restrictions on imports.

Compliance with the WTO demands a lot of discipline in the industrial segment and some countries could not achieve their objectives in the given time frame. That is why countries like Malaysia and Pakistan sought extension and were granted another two years from Jan 1, 2000 to Dec 31, 2001 to wind up the (TRIMs). Two years went by and the world trade body approached the applicant countries for submission of their phase-out plan, again the countries failed to do so, as they had not achieved the targets set for compliance.

Pakistan's Automobile Sector

In the case of Pakistan's automobile sector, the manufacturers were not in a position to achieve the required deletion level set by the government, as indigenisation of high-tech capital intensive items such as engines, transmission axles, suspensions etc. require higher demand and heavy investment. The automobile industry is performing sub-optimally; where mostly the manufacturers are importing the CKD (completely knockdown kits) and assembling them locally, leading to minimum inclusion of local components. Ideally, the automobile component industry that comprises 750 various sized industries (large, medium and small) should benefit from the deletion program proposed by the WTO. By contributing to the up-stream industry in achieving their deletion target and consequently bringing down the cost of production and market prices of the vehicles. This, however, is not possible at this point in time because the automobile component industry is in an immature state with low efficiency level mainly attributable to wide scale smuggling of the auto parts, implementation of GST and lack of technical innovation.

The automobile industry seeks exemption from the implementation of the TRIMs agreement up to Dec 31 2006 to get enough time for the industry to develop into a self-sustaining industry and subsequently be in a better position to face international competition. However, the GoP has rejected the demand of the local automobile manufacturers and has urged the industry to comply with the time frame of Dec 31, 2003 to wind up the (TRIMs) under the 2+2 pact. This was decided by the Ministry of Industry and Production, while submitting a summary to Economic Co-ordination Committee (ECC) of the cabinet. Further, Pakistan has apprised the WTO that its deletion program would be completed in three phases by Dec 2003; household items will be phased out, as the first step, while automobile industry's deletion program will be carried out in the third and the final stage.

The Like-Minded Group comes to rescue

The latest development on this front is that all the developing countries have realized that at the time of agreement with the WTO they were assured that their exports would be increased Pakistan was given attractive incentives for the textile and agriculture sectors - but this has not happened in the previous years. Therefore, to safeguard their interests the developing countries have formed the Like-Minded group of 18 countries and have resolved to take a strong stand in the World Trade Organization's Doha Ministerial Conference to be held in November this year. The group that comprises Pakistan, India, Malaysia, Egypt, Kenya, Uruguay, Tanzania, Indonesia and some Latin American countries like Cuba, Dominican Republic, Honduras etc. will meet in Geneva on September 17 to evolve a joint strategy on a 'give and take' basis.

Future Outlook

Change in the business environment may not necessarily hinder growth of a developing nation but any strategic move by the government has to be inline with the economic requirements of the country. One reason for the conflict of opinion between the automobile industry and the government seems to be ambiguity of goals of the two bodies. To be able to carry out this program successfully the government needs to be very attentive towards the auto sector with an outline of perceptive policies and effective strategies, as the sector will be more vulnerable to the external environment than before.

We feel that the automobile industry needs more time before being exposed to the world at large, since our automobile industry does not enjoy economies of scale that other industrialized nations do, where output of cars run into millions resulting in lower cost per car. Even a country like Malaysia sought protection for its automobile sector for a period of six years. Lets not forget India's successful import substituting strategy for its automobile sector, where the auto industry was allowed to fully mature before being exposed to any kind of international competition. Now India is in good position to bring its auto industry in line with the WTO norms and bravely compete on the international platform.

Investment Perspective

In our opinion, membership in the WTO will now mean survival of the fittest which may mean strong foreign partnerships and higher deletion levels. Cursorily we feel that in the universe of car assemblers and manufacturers, Pak Suzuki- with the highest deletion rate of 68%, Honda Atlas- with the second highest deletion rate of 46% and Indus Motors- with the third highest deletion rate of 42% are well positioned to show resilience against any market turbulence. However, for any concrete forecasts of the sector we shall wait for the final round of talks that are to be held between the Like-minded group in Geneva in mid September, followed by the Doha Ministerial Conference in November.

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