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KSE-100 index to breach 1500 barrier by end December 2001

Nov ,19 - 25, 2001

Even before September 11 the KSE-100 index was touching 1200 lows with the possibility of a downward plunge. But remarkably the market declined and bounced back sharply. This is definitely not in keeping with any normal market's reaction to an crisis in the region, and certainly not the KSE which has been previously demonstrating sharp movements in reaction to political developments. Over the last many weeks, the KSE has shown remarkable resilience and experienced an unexpected sharp rebound which as yet does not seem to have lost steam.

A number of factors seem to be responsible for the persistent upward movement of the KSE-100 index. The index would have shown higher gains had profit taking was not common. While the upward movement in prices of volume leaders was understandable, bullish sentiments in Adamjee Insurance was an evidence that market manipulators were also very active. After resolution of HUBCO dispute they were in dire search of some scrips and Adamjee was an instant pick. Though, there is a forecast that there may be change in the composition of Board of Directors, even before the annual general meeting, the point which continues to haunt is mounting losses, an outcome of not following good management practices.

The factors which have contributed to revival of both institutional and retail investors in equities market are: 1) the GoP and SECP efforts to deploy large funds through market support funds, 2) improved sovereign rating, 3) a spate of foreign buying. However, some analysts attribute the upward movement of index to announcement of financial results and attractive yields and a forecast for yet better results for the year 2002.

Most of the volume leaders and even second tire companies have posted not only good results for the year 2001 but have also announced attractive dividends. The other sectors which were able to attract attention of investors were: energy (comprising of oil and gas distribution companies also), automobile, banking and fertilizer. All these sectors continue to enjoy strong fundamentals. However, textile sector has not been able to attract investors as yet.

There are clear indications that textile sector will not pay the similar dividend it had paid for the year 2000. However, the year 2002 is expected to be a good year, mainly due to stable cotton prices. After September 11, textile exports have been affected, but in year 2002 higher exports are expected due to increase in textile quota ceilings by the European Union (EU) and the US. The EU has already reduced duties and increased quota ceiling by 15 per cent. The same is also expected from the US.

The earnings potential of gas distribution companies has improved due to rise in volume. For the year 2001 both the Sui twins have announced dividend after a long time. Profitability of oil distribution companies has been under pressure due to declining POL demand. But the recent reduction in POL prices may help in containing further decline. Automobile sale has been high due to car leasing programme. Now a large percentage of fresh business of leasing companies consist of car financing. However, this policy has helped in higher sales volume of small cars.

Though, earnings of commercial banks are expected to come under pressure due to shrinking spread, the decrease in corporate tax and increase in borrowing of private sector are positive signs. Fertilizer sector has witnessed a robust demand and no probability of increase in feedstock price, in the short term, is expected to improve overall profit of these companies. The reduction in interest rates is also expected to have positive impact on the earnings of leasing companies.

Sales volume and profit margins of companies involved in consumer goods are expected to improve due to: increase in disposable income of rural population, decrease in smuggling and larger purchases for Afghan refugees. Another factor which has the potential to improve disposable income/per capita income is greater spending on developmental projects by the GoP.

After identifying the key sectors which offer opportunities in equities market, equities analysts also warn retail investors to refrain from herd mentality. They suggest that investors should make thorough investigations about the companies before they buy their shares. They also warn that investors should not be carried away by the market manipulators. Investing in blue-chips is much easy but at the same time they should expand or keep their investment portfolio diversified.

Saying this much, it is also necessary to ask the regulators to play their due role. Some analysts say that the watchdogs do not awake till a problem gets out of control. They only do the job of fire fighters but do not pay any attention to the smoke. Ensuring good governance is a must for the protection of small investors, who offer the largest investment potential.