THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Mar 29, 2003

 

MARKET THIS WEEK

As a whole, the market maintained the bullish momentum, which commenced last week and the KSE 100 Index rose by 3.47% from 2,652 points last week to close this week at 2,744 points. Improved volumes have also reaffirmed our views that the market has 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

indeed started regaining positive sentiment. Average daily volumes increased by 6.85% this week from 156.92mn shares last week to 167.67mn this week. We believe that most of the increase was triggered by the decrease in interest rates on long term government bonds coupled by expectations that the war on Iraq may be short-lived

The stock of the week was again PTCL, which saw considerable interest from both local as well as foreign investors. Hence, the stock reflected an increase of 3.81% during the week.

OUTLOOK FOR THE FOLLOWING WEEK

We believe that the market is likely to remain range bound during the next week largely because international political and economic uncertainty is likely to cloud investment decisions. As interest rates in the market reach new lows, we continue to recommend our investors to invest in yield bearing stocks at competitive prices.

FUNDAMENTAL CHANGES

Long-term yields declined further this week, as the last PIB auction saw an average of 150bps cut in effective yields on these government bonds. The State Bank picked PkR3.15bn comprising of PkR1bn in three year, PkR1bn in five year and PkR1.15bn in ten year PIBs. Due to the considerable liquidity in the market yields declined by 187bps to 2.87% on three-year bonds, 174bps to 3.19% on five year bonds and 153bps on ten year bonds. According to market sources, the decline in rates is largely because the Govt., which has historically remained the single largest borrower in the inter-bank market, is curtailing its rupee borrowing. Coupled with previously issued bonds maturing the inter bank market is flooded with liquidity and the avenues for investment are few. Currently, the real rate of return on Govt. bonds is negative; as a result we believe that these rates are not really sustainable in the longer run. In any case, we expect the lending rates of the banks to decline as banks try and encourage private sector credit to maintain spreads. The market responded positively to this development, as stocks are the only investment at present that are still providing double digit returns.

 

 

To the shock and awe of the coalition forces the war on Iraq or "Operation Iraqi Freedom' has lasted much longer and has caused more casualties than expected.

This has caused the investors as a whole to become somewhat nervous since majority was expecting that the war on Iraq will be as anticlimactic as the war on Afghanistan was. To add icing to the cake, the Prime Minister has openly criticized the war and the opposition and the Govt. have agreed to jointly criticize the war in the Senate meeting. The fact that the President has remained interestingly mum on both the war and the domestic situation, has resulted in the donor agencies ignoring the politician as we believe that they see him has the person running the country. However, there has been some unease in the market as investors discount the new developments.

The government has decided that it would be providing support prices to only cotton and wheat this year, while the prices of the remaining seven crops previously supported would be left to the market forces. This move is mainly in response to the international donor agencies demand that the Govt. should stop providing support and subsidies to the agricultural sector. Although we believe that in the long run this move is likely to be beneficial to the farming community as a whole, short-term incomes will surely be affected. Inspite of the fact, the support price mechanism is far from being completely efficient, this new move will add an element of uncertainty to the farm incomes. We believe that the fertilizer usage may be adversely affected.

TECHNICAL OUTLOOK

Index levels have approached a key resistance area from 2,742 to 2,767. The latter level is now required to firmly give way for the market to retest its life high of 2,991. Moving above 2,661 (1994 closing peak) is a good omen for medium and long-term positive developments. Thus, key risk should be kept below this level. Short-term support for this week is placed around 2700. The three core stocks PTC, HUBCO & PSO would be key drivers to sustain the index above 2,767.

THIS WEEK'S TOP STORIES

ICP SEMF bidding messages for PC!

Of course, the successful bidding of ICP SEMF is a great success story for the new look Privatization Commission (PC) in the current uncertain macro environments. However, this transaction also has a significant message for the PC, where it should try to focus on those transactions, which can be divested locally. The easy money environments locally are likely to be of great help to all the local investors where they can generate economic values owing to their cheaper cost of funding. As far as the fate of other large ticket items is concerned, we feel that current Middle East situation will have its toll over the PC's short-term performance.

 

 

ENGRO INTERESTING PERCEPTION PLAY

Comparing Engro's share to FFC's share is always interesting, as we tend to see something new every time. Over the past five years or so, Engro has traded at an average of 1.47x to FFC, largely because of investor perceptions. However, perceptions are changing as the premium placed on Engro over FFC has been decreasing gradually. Over the last few months Engro has been trading at 1.15x FFC. With Engro becoming ex-dividend and ex-bonus tomorrow, its adjusted price amounts to PkR82.73 per share. FFC is currently trading at PkR81.80 per share consequently we believe that Engro's price should see an increase in the next few weeks as investors try to restore parity. On fundamental basis we continue to prefer FFC to Engro but do see a window of trading opportunity in the latter.

POL PRICE LIKELY TO REMAIN FIRM

The war began, and so did the decline in crude oil prices. However, the market expectations for the extent of decline was too much. The Arab Light, which is taken as a benchmark for pricing POL products in Pakistan, has hardly lost much value. The uncertainty over the timing of war is now over. But there still remains the uncertainty over how long it would take for this war to end, and resumption of oil supplies. The possible resumption of supplies from Iraq, the second largest producer of oil, remains a key issue for the oil markets. On the domestic front, inspite of growing agitation, the government has continued to pass on the cost impact to the end consumer.

HUBCO-LINKING UP WITH KESC

Linking Hubco with KESC, while beneficial for KESC for meeting electricity demand in Karachi, is not likely to have a major impact on the earnings of Hubco. Hubco's tariff is structured in a manner that most of the return to shareholders comes through the "Equity Return Component', which is based on 65% capacity load factor. Above 65% capacity load factor, Hubco only bills for variable cost, and does not include any return to shareholders.

MARKET ROUNDUP

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LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

10.03

10.36

3.29

Total Turnover (mn shares)

784.60

808.34

3.03

Value Traded (US$ mn.)

638.69

635.08

-0.57

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

156.92

161.67

3.03

Avg. Dly T/O (US$ mn)

127.74

127.02

0.57

KSE 100 Index

2651.71

2744.18

3.49

KSE All Shares Index

1636.52

1695.48

3.60

 

 

Source: KSE, MSCI, KASB