THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated June 06, 2003

 

MARKET THIS WEEK

The KSE-100 index rose by 0.62% (19 points) during the week from a close of 3,080 last week, to 3099, missing the coveted round figure by a shade. The market performance remained fairly volatile, which was expected, as these are unchartered territories. The cement sector's performance remained impressive as well as that of other second tier stocks, while that of top tier stocks was disappointing. We believe that

 

 

 

unless these stocks begin to perform the market will be unable to sustain the bull run for long. Volumes were also strong during the week, which is reassuring the general confidence in the market. Volumes rose from 232.6mn shares last week to 268.3mn shares this week, reflecting an increase of 15.3%.

OUTLOOK FOR THE FOLLOWING WEEK

We expect the market to consolidate within a narrow range. Two factors can change the market direction either way. The best case scenario would be a resolution of LFO issue and an announcement of PSO's bidding date within next week. This can lead the market to 3200 onward. On the other hand if both could not be materialized, market can enter into a correction phase where it can come down to 3000. The probability of the both scenarios is 50:50.

FUNDAMENTAL CHANGES

Politics took a forefront this week with the debate regarding the Legal Framework Order getting extremely heated up and the opposition threatening to delay the budget FY2004. Developments on the international side were, on the other hand, appear positive as the government making decisions regarding militant operations in occupied Kashmir. Furthermore, the government has also released some preliminary information about the federal budget. Interest rates have also seen a reversal in their recent trend:

•The heated political setup, where the opposition is vehemently opposing the LFO, while the government and the establishment are also refusing to compromise on this issue. The rigid stance adopted by the President is a bit disconcerting and we believe that the entire situation is likely to get worse before getting better. As we have seen recently, the market seems to be completely ignoring the entire political uncertainty largely because we believe that the investors are concerned as long as the economic reform process is not disturbed.

•International politics has been looking favorable for some time and this week with the announcement of a fairly moderate high commissioner, ordering closure of all militant offices in Azad Kashmir is likely to be a trigger for more open talks between the two countries.

•ECC has approved an allocation of PkR160bn for FY04 PSDP. This development coupled with likely incentives in the forthcoming budget resulted into an impressive performance for the cement sector.

•After a prolonged period of declining interest rates, the latest Treasury Bill auction saw a 16bps rise in the cut off rates on the government instrument to 1.84%. The State Bank of Pakistan picked up PkR23.7bn against a target of PkR22bn. This reaffirms our earlier stance that the interest rates had bottomed out and we believe that average interest rates in the economy are likely to go up by 100bps in the next six to eight months. Rising interest rates is likely to have a detrimental impact on stock prices. However, as the interest rates are very low at present, we do not expect any major negative impact.

FY04 BUDGET — AUTO SECTOR EXPECTATIONS

We do not expect much change in the current shape of the auto sector in the budget. First, the government will keep lowering the duties on all the categories of the vehicles, which may lead to slight reduction in the car prices. Second government will also be reiterating its commitment that it will be seeking further extension from the WTO for the implementation of TRIMS for the auto sector. Third we do not expect the government to allow the import of second hand cars while authorities will keep their rhetoric alive regarding the reduction of the car prices by the auto manufacturers. We maintain our liking for the auto sector where Atlas Cars is our top pick.

 

 

OUR EXPECTATIONS

•We expect further reduction in the import duties for various categories of the vehicles. The reduction is likely to be the usual 10% downward adjustments in the import tariffs.

•Theoretically, the government should announce its entry into WTO regime for the auto manufacturers with the implementation of TRIMS, effective from January 01, 2004. However, we do not expect this to happen. In fact the government will come up with a claim that it has contacted the World Trade Organization to extend these TRIMS for another year or so. Despite this announcement, we feel that government will push the auto manufacturers to increase their deletion rates in the days to come.

•We also expect the government to come up with stern warnings to the auto manufactures to raise their current production levels as all the three main car producers are not operating at their full capacity (three shift basis). These companies are likely to get a tough line from the government on their alleged involvement in creating an atmosphere in the country where the new car purchasers have to pay either full car price almost 6 months in advance of the actual delivery or to offer some premium over the scheduled prices for these cars.

•We also expect government to continue its efforts to bring down the prices of the cars by influencing the local auto manufacturers to reduce their product prices. Though, the response from these manufacturers is very dismal till now, the government may come up with a strong statement in the budget.

•We do not think that government will allow the import of second hand reconditioned cars into the country as it would continue its current policies of protecting the home industry from any tough competition.

•Any announcement on public transportation scheme may bring positive impacts for the commercial vehicle manufacturers. The possibility of any such announcement is high as Jamali government has been fairly active on this front.

INVESTMENT PERSPECTIVE

We are Overweight on the sector and expect all the auto manufacturers to outperform the underlying KSE 100 index. However, Atlas Cars is our top pick in the sector.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

11.79

11.86

0.55

Total Turnover (mn shares)

1,163.17

1,341.44

15.33

Value Traded (US$ mn.)

813.67

967.29

18.88

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

232.63

268.29

15.33

Avg. Dly T/O (US$ mn)

162.73

193.46

18.88

KSE 100 Index

3079.95

3099.04

0.62

KSE All Shares Index

1941.76

1957.20

0.79

 

 

Source: KSE, MSCI, KASB