THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated November  08, 2003

 

MARKET THIS WEEK

Though the market has shown a significant volatility throughout the week by first going up nearly 2% and then coming down about 3%, on a net basis, the index ended the week at slightly below last week's closing level. The Ramzan factor, as expected had its negative impact over the volumes whereas the SBP's flirting with

 

 

 

 equity investing rules has also affected volumes in general. Throughout the week, the market was shrouded with uncertainty about the aforementioned regulatory changes. Moreover, the market has also seen some portfolio adjustment whereas most of the investors have tried to create space for the OGDCL subscription. Towards the end of the week, some improvement was the result of over-sold positions in most of the speculative stocks.

OUTLOOK FOR THE FUTURE

Instead of confining our focus only on next week's outlook, we are presenting a summary of our strategy note, which will be released next week:

We are changing our "Book Profits" stance to "Range-bound". In our view the market is entering into a consolidation phase. The short to medium term horizon will be featured with market trading within a narrow band whereas we also expect the volumes to dry up. Here are our justifications for our changing stance:

•The liquidity side of the market is likely to go through interesting changes wherein both the demand and supply sides will make major adjustments in the medium term. On a net basis, the Pakistani market is moving towards "more stocks — less money" from "less stocks — more money". This phenomenon will affect market performance over the short to medium term.

•Having said that, we do not expect the current liquidity driven rally to totally die down as the previous such rallies were fated. On a relative basis, the liquidity side is still better than the historical trends. And this phenomenon will keep the market in a range bound situation.

•In the current interest rate scenario, the required rate of return from Pakistani stock market should be close to 13%. Based on this parameter the market's fair value is close to 4462. However, we feel that with the likely imbalance in stock supply and cash liquidity, the market will keep trading within a 15-20% range. This translates into a short to medium term trading range for the market at 3550-3850.

•We suggest our readers to revert back to first tier stocks with more focus on dividend yields, as yields will protect the downsides in the consolidation phase. Moreover, our readers should also exploit the mega divestments of the government of Pakistan as it is offering stable companies with good business models at relatively lower valuations. We suggest an overall avoidance of second and third tier stocks.

COTTON CRISES: POSSIBLE CONSEQUENCES

Even at this point of cultivation of the cotton crop, there is enormous confusion over what the actual production will be. Panic and confusion have lifted cotton prices to all time highs, yet the Government has done very little till now to effectively deal with the problem. Continued damage to the textile sector because of high cotton prices is likely to affect growth in exports and GDP, as well as the employment level in the industry. Unfortunately, members of the textile industry, instead of coming together to solve the problem, are getting involved in more and more conflicts.

The confusion prevailing in the cotton industry can best be understood by the heading of an article printed in the Friday edition of a local newspaper: "Stakeholders divided over size of cotton crop".

The current cotton crisis is attributable to two factors: heavy rainfalls and widespread pest attacks. While no one can control rainfall, it has been argued that the Government should have anticipated the pest attacks, which are a natural consequence of humid/rainy weather. Moreover, the Government's slow reaction to these attacks has generated a lot of criticism. Furthermore, there have been claims from many regions in the country that the pesticides that are available are adulterated and hence useless.

POSSBILE CONSEQUENCES OF THE CRISIS

The textile industry has always played a key role in the economy of Pakistan. Continued damage to the sector due to high cotton prices has the potential to seriously affect both exports and GDP growth. Moreover, considering that the level of employment is one of the few key economic areas still lagging in the country, the toll this crisis is likely to have on jobs in the sector should perhaps be the biggest concern.

 

 

Most spinners seem to agree that the current price level is unsustainable and is likely to come down latest by the end of this calendar year. However, they make a grim prediction that the fall in prices will be a consequence of decrease in demand of cotton due to the shutting down of units rather than an increase in availability of the crop. The situation is worsened by the fact that if local producers are unable to satisfy orders from other countries, it will be very difficult to bring back spurned foreign buyers.

Apart from affecting the economic viability of the textile sector, the current situation also seems to be taking a toll on the cohesiveness of the industry. The recent announcement by some members of APTMA to depart from the organization is being attributed to wrong doings by its management. This announcement followed the denial by the Chairman of APTMA that the organization wants the Government to ban export of cotton, despite the printing of such a request in the newspapers by several key members of the organization.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

14.00

13.97

-0.21%

Avg. Dly T/O (mn. shares)

149.70

127.69

-14.70%

Avg. Dly T/O (US$ mn.)

182.25

116.04

-36.33%

No. of Trading Sessions

5

5

 

KSE 100 Index

3781.03

3763.15

-0.47%

KSE ALL Share Index

2393.29

2387.90

-0.23%

 

 

Source: KSE, MSCI, KASB