The KSE - Overview:

Updated on Feb 26, 2001

Do valuations matter? One is forced to address this issue after observing the "Yo — Yo" behaviour of the Pakistan market, since the start of this year. YTD, the KSE-100 has lost a net 4.4% — from 1507.60 on December 31, 2000 to 1440.43 last Friday. Market fundamentals have changed some what during this period from the bottom up prospective. Hubco showed positive earnings surprise while PTCL ended up with a negative earnings surprise. Likewise for PSO and Shell, respectively. The macro picture also continues to oscillate between hope and despair. While underlying fiscal and monetary indicators are clearly showing improvement over their long term (past five years) trends, the shorter-term (6-9 months) picture is still one of below target tax revenues, pressure on forex reserves and the exchange rate, upward trend in interest rates and continued sluggishness in agri and industrial sectors causing near term spike in both blue collar and white collar unemployment.

The market impact is that the KSE-100 Index has become range bound and is being driven primarily by technical factors as institutional investors have also shortened their time horizon and are, at least for now, content to take profit of a few percentage points and return to cash positions in their portfolios. Thus valuations have taken a back-seat for the time being.

The above, however, does not mean that valuations do not matter. We believe that valuations do provide a signaling mechanism for investors but for a medium to longer term perspective. What is more important is to first assess valuations with respect to certain benchmarks and then attempt to gauge what is the likely fair value of the market. With this base determined, investors can then develop core portfolios around which they can actively trade a certain portion of funds in an attempt to enhance their total return.

On all the above parameters, the Pakistan market has one of the lowest (if not the lowest) valuations. How does one interpret this? Either investors are completely missing the point or there is some other factor operating here. Also, consider the following: in terms of average daily volumes (in US$ terms) the Pakistan market has displayed much more liquidity and the depth than many Asian markets.

This clearly highlights the trading nature of Pakistan market as well as the potential for trading opportunities. At the same time, it highlights the importance of analyzing and assessing trigger points for major market moves. In each of the above years, there was a clear trigger event (or events) that pushed the Index into new territory. Reasonable assessment of the trigger event and rapid portfolio moves between cash and equities would thus have been the key drivers of out performance.

SECTOR OUTLOOK

Synthetic fibre

The revenue impetus of the PSF sector is largely recognized by the undulations in the commodity's cycle. Hence, after an outstanding FY00 performance, most PSF manufacturers are now preparing to embrace a much smaller earnings growth in FY02.

High volumes and pricing power were the helm that Pakistan's synthetic fibre sector steered to their advantage posting an approximate 24% sales growth figure in FY00. More importantly, gross profits rose by 46% with gross margins expanding to 16.8% from 14.2% in FY99. As a result sector earnings were estimated to have grown by 62% in the period.

Domestic PSF demand continues to remain robust in FY01 due to sharply higher local cotton prices this season, which touched a peak of PkR2800/maund (around 88-89 cents/lb) in December verus PkR1400/maund last year. While cotton prices have slipped down to PkR2300 levels currently, they remain sufficiently high to allow continuing switch over into PSF by the textile industry. This trend is likely to keep PSF demand growing by 10% in FY01, according to our estimates, after discussions with leading textile producers.

However, our premise for predicting lower earnings in FY01 is based on pricing, which does not present a very rosy picture. After two rounds of reduction since November, the current price being charged by local PSF producers is PkR66.8/kg, almost the same as landed cost of imported PSF. This is a far cry from PkR71/kg which the PSF producers were charging in November 2000. The key factor is the sharp pull down in international PSF prices that fell from 90 cents/kg prior to January to 75-76 cents/kg at present. Lower PSF demand from the pivotal buyer, China, is said to be the main cause for this fall. We also feel that overall demand for PSF is below expectations due to a slowdown in textile exports orders from the USA and Europe.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US$ bn)	6.42	6.04	-5.92
KSE 100 Index	1512.84	1440.43	-4.79
Total Turnover (mn shares)	739.81	960.94	29.89
Value Traded (US$ mn.)	587.72	491.84	-16.31
No. of Trading Sessions	5	5
Avg. Dly T/O (mn. shares)	147.96	192.19	29.89
Avg. Dly T/O (US$ mn)	117.54	98.37	-16.31
MSCI Pakistan Index:
Pak Rs.	100.24	94.12	-6.10
US $	43.43	40.23	-7.37

.Source: KSE, MSCI, KASB

ASIA PACIFIC & AUSTRALIA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Bombay BSE 4122.16 -140.39 -3.29% Hong Kong Hang Seng 15280.56 +181.92 1.20% Singapore Straits Times 1946.86 +2.24 0.12% Sydney S&P ASX 200 3292 -0.60 -0.02% Tokyo Nikkei 13246 +172.64 1.32%

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