The KSE - Overview: Making history is the new trend

The KSE-100 Index seems to be creating its own momentum (triggering nostalgic memories of the 2000 rally) is now running riot smashing every single hurdle in its way with increasingly strong volumes. The only argument that can be presented is of easy availability of funds in the market. Only minor foreign investment came during last month, so we can hypothesize that further funds flow in the stock market may be expected. Further new funds flow into the market is likely to send the Index spiraling yet further upwards, and we could see 1994 levels repeat themselves, except there are no external account compulsions to divert funds away unlike in 1994 and 2000.

On a purely technical basis. The KSE-100 Index is currently making a new technical history, where it already has breached all its resistances between its 3-month target of 1700 levels and closed at 1785 for the week. Hence, we are forced to reshuffle our technical indicators to look at the current situation.

Technically, "a stock market's typical cyclical up trend may last 12-24 months; the advance normally consists of two-three advancing phases interspersed by significant corrections, typically lasting 1-4 months. In this case, the up trend is the long-term trend and the two significant corrections are intermediate downtrend". It is also of some interest that each advance is of greater intensity from its previous advance.

If we aren't mistaken, current indications for the second advance are similar to the second advance in 1994, which led the market to 2500 levels. At that time, all overbought indicators failed and market was similarly defying fundamental and technical indicators. The interesting thing is that the second advance in 1993-94 was almost 4-6 months long and had also started from 1275 level. So are we looking at 2500 now??

Well, it is possible with lots of ifs and buts. We will start with intermediate term to long-term trend. The market has tested 1800 levels and closed at 1785, which is a strong resistance/support for the Index. In our opinion, if the market succeeds in sustaining itself above 1745 -1725 in the coming 3-4 trading days the market should cross 1800 levels easily. After which the main hurdle comes at 2000, which might provide strong resistance for the market.

So what should be the strategy? Market is overly bullish as always in the bulls market, also overvalued. Market went up by almost 115 points, where a slight correction of 31 points was witnessed on Tuesday. We expect market to test its next resistance at 1800-1825, after which it may correct itself further. We advice investors to take any weakness as an opportunity to re-enter in the market rally however, with a tight stop loss.

OMC Sector:

Distribution Margins to Increase

POL prices to go up

The Petroleum Advisory (PAC) headed by the Petroleum Minister, representatives of the Oil Marketing Companies (OMCs) and dealers have jointly announced a revision in POL distribution margins and dealer commissions. This would result in a 14% jump in POL prices going forward. It has been decided that the price increase would come in two phases with phase I starting immediately and phase two starting in July 1, 2002. Under phase one, a 6.5% increase will come into effect followed by a 7.5% rise under phase II.

Break-up of margin increase - OMCs and Dealers

The margins of OMCs would be increased by one percentage point to 3% of the POL sales price immediately and 3.5% with effect from July 1, 2002. The dealers' commission would also be increase from 3% to 3.5% immediately and to 4% from July 1, 2002.

The rise in dealers' commission and distribution margins has long been a demand by both sections of the petroleum industry but was not implemented by the Government of Pakistan (GoP) due to various reasons. This time around, however, the change of heart took place, though the increase has yet to be approved by the Economic Coordination Committee (ECC), due to one simple reason (please read Pakistan Strategy Document 2002: Privatization).

In our opinion, the GoP's plan to offload PSO can never materialize without a reasonable increase in OMCs margins especially after the recent turn of events globally. POL sales volumes plunged due to fall in local demand and international crude oil prices crashed due to the declining global demand of POL products. The result was a sharp decline in potential bottom line figures for the OMCs in Pakistan.

Case in point - PSO

In order to fully understand the impact of revision of margins on PSO's profitability, we have first outlined the results with existing margins and later compared it with the possibility of a jump in OMCs distribution margins.

The issue of conversion to natural gas is still alive and kicking as, under GoP's guidance, the natural gas T&D companies have plans to invest up to PkR20bn within the next two-three years. This would translate into substitution of natural gas in place of furnace oil in the local industry.