2- IDEAS 2002
3- ELECTION 2002




Sep 09 - 15, 2002


SARAH ALI did her Bachelors in Business Administration from Greenwich University. She worked for two years in Atlas Investment Bank as Executives Credit and Marketing. Later, she joined Khadim Ali Shah Bukhari & Co. (KASB) as an Investment Analyst where she has been working for the last one year. She is currently KASB's analyst for non-banking financial institutions, cement and automobile and allied sectors.

PAGE: What is a research analyst's job description?

SARAH ALI: The formal job description of a research analyst, particularly for equities, is to identify specific stocks that the analyst feels have more than an even chance of out performing the broad market. But this is just part of the story. Ultimately the job of a research analyst involves the entire spectrum of studying and understanding various industries and their behaviour over the economic/business cycles and the way specific companies are expected to fare within the industries. A well-run company in a growing industry is a definite candidate for investment analysis, while a well run company in a poorly performing industry may not be a great investment even if it is a great company.

PAGE: How do you arrive at the recommendation of a "Buy" or a "Sell" for any stock?

SARAH ALI: An analyst puts a 'Buy' recommendation on a particular stock if it expected that over a certain period of time, say for a year, its price or market value is likely to rise more than the overall market. The opposite holds for a 'Sell' recommendation. However, this is simplification of an analyst's job who is looking at the fundamental for a company. I have to consider the overall sector growth prospects to determine and quantify the demand for the company's products which lead directly to the forecast of capacity utilization. Followed by a comparative analysis of the industry, one can assess the pricing power of the company which directly affects both the top line revenue as well as the gross margins. One then has to look at the cost related factors including operating efficiency and effect of leverage before one forecasts the bottom line earnings and cashflow. All of this leads to the valuation exercise where I deft various scenarios against my base case assumptions and ultimately make a judgment call about the possible range of fair value of the company's share.

PAGE: There maybe a conflict of opinion regarding a stock recommendation between the trading desk and the research. How do you avoid such pressures?

SARAH ALI: The inherent conflict between the need for independent research and needs of the sales team and trading desk is a major issue and a problematic one in the securities industry all over the world. This conflict is not just limited to the sales and research but also investment banking and research. Recently, in developed markets particularly the US, the regulators have taken strong measures to make research more independent from the brokerage houses' sales and corporate finance functions. In Pakistan currently there is no such specific regulatory framework in this area. So it really boils down to the analyst's own professional ethics and personal integrity to resist pressures from sales and corporate finance to give predetermined recommendations. It also depends on the ethics of the brokerage houses' management whether they allow independence in analyst's recommendations rather than directly or indirectly influencing or forcing them to make recommendations that the sales desk or the corporate finance function demands.

PAGE: Why is the research coverage limited to a very few sectors and concurrently a handful companies?

SARAH ALI: One characteristic of the Pakistan market is severe lack of share liquidity in all but the most blue chip large capitalized stocks. As a result, it is not worthwhile to cover all the companies as hardly any trading takes place in them. Further, shares of these illiquid companies are held by the sponsors and thus their stock exchange value can diverge vastly from their fundamental value due to 'sponsors block trading' or some times even stock price manipulation. In reality, 90% of the trading volume is generated by not more than 20 stocks and hence analyst cover of the same.

PAGE: What is the difference in the investment perspective of local and foreign investors?

SARAH ALI: Foreign investor is mainly looking at the macro level country risk because he or she is likely to invest in the largest capitalization, top 10 or 12 stocks. If the country risk is reducing then on an average all these blue chips will move up and if the country risk is deteriorating most will move down. That is the key concern for the foreign investors. For domestic investor while country risk is an important factor company specific fundamentals as well as short term trading opportunities tend to be more in focus. The domestic investors' potential universe is likely to be 40 to 50 companies, whereas foreign investors usually focus top 10 to 12 stocks.