the market on Thursday. Banks were the losers while
retail investors also en-cashed some of their holdings to raise cash for
the PPL subscription. Friday was the weakest day of the week with the
index coming down nearly 1% to 5,387.84. The key concern was the debt
market where the yields went up further in panic selling from the banks.
OUTLOOK FOR THE FUTURE
Though the overnight market is quite liquid, badla
rates may go up slightly owing to rising PIB yields. We expect most
companies to come up with the dates for their June 30th result
announcements, which is likely to trigger some activity in respective
stocks. We also expect trading activity to improve in the provisional
trading of PPL shares as most of the subscribers are unlikely to get
their desired quantities owing to the relatively small issue size. We
maintain our earlier view that market will stay range bound with a
trading range of 52505500.
The major developments this week were:
•In a recently held meeting, the Secretary Ministry
of Petroleum & Natural Resources has asked gas companies to complete
their expansion projects ahead of schedule.
•WAPDA is reportedly facing a shortage of 1000MW
currently, and estimates are that the demand supply gap is likely to
rise to 5000MW by FY06.
•A sharp fall witnessed in US cotton prices during
recent weeks has led to new concerns for the local textile and cotton
•Reportedly, car sales shot up by 57% during FY04
to 96,674 units from the 67,955 units that was reported last year on the
back of the growth in car financing and increased production capacity in
•The State Bank mopped up PkR51.5bn by selling
one-week T-bills through an OMO on Monday.
•As per the Federal Bureau of Statistics, CPI
inflation reached 4.57% on an annualized basis during FY04, versus the
3.1% that was recorded during FY03 and versus the SBP's revised target
of 3.9-4.2%. ???CBR issued a clarification with regards to its announced
decision on Monday to set the cumulative taxes and duties on imported
cars in fixed dollar terms rather than as a percentage of the vehicle's
value. ???Pakistan and India announced peace talk schedule on Tuesday.
•Telenor has announced plans to invest US$5bn over
the next 5 years to establish its franchise in Pakistan.
•The Ministry of Petroleum and Natural Resources
has invited bids for exploration rights of 5 blocks in offshore Indus in
•Domestic LPG prices have gone up by 13-16% over
the last month.
•PSO has received offers from Fal Oil, Hascombe and
Petro Plus for HSFO import.
•The Water and Power Development Authority has
announced that it will be extending the incentive package for industrial
consumers till 31 Dec 2004.
•Pakistan has received the Best Sovereign Borrower
award from Euromoney in the magazine's June edition.
•As per a source in the Ministry of Industries, the
auto sector may be included in Pakistan's SAFTA sensitive list, which is
to be exchanged with other SAARC countries during the fourth meeting of
the committee of experts that is to be held in Bhutan from July 21.
•The Ministry of Petroleum and Natural Resources
announced on Thursday that Orient Petroleum Inc. has discovered oil and
gas reserves in Mirpurkhas Block in Sindh.
•Reportedly, Pakistan received US$3.823bn in net
remittances during FY04.
•NIT, Pakistan's largest open-ended fund has been
given permission by the relevant authorities in Islamabad to market NIT
units in the Middle East.
•The appointment of a Pakistani as UN
representative in Iraq was the first step and the government may
consider the Iraqi government's request for troops.
NON-MACHINERY TRADE BALANCE
While machinery imports have been blamed almost
entirely for Pakistan's worsening trade deficit, we feel that there is a
bit more to the story. Our analysis indicates that while machinery
imports contributed significantly to import growth, non-machinery
imports also grew significantly during the year. In our opinion, in the
future we expect machinery imports to pick up further pace owing to
industrial expansions, BMRs and the telecom sector de-regulation, while
non-machinery imports are also likely to show significant increase as
more imports are demanded to satisfy Pakistan's growing economy. We thus
expect the rupee to depreciate in the near future.
A lot has been said about Pakistan's rising trade
deficit, which hit US$3.2bn in FY04. This rise in the trade deficit has
been blamed almost entirely on the rise in machinery imports.
BREAKUP OF IMPORTS
As is evident, imports have been growing strongly
over the past two years after remaining stable for a number of years.
While the general assumption has been that the growth
in imports has come about as a result of the growth in the import of
machinery, as is evident from the graph below, this is not entirely
true, since non-machinery imports have also shown substantial growth
over the same period. It may be noted here that machinery imports made
up only 26% of total imports last year.
ADJUSTED TRADE BALANCE
In order to investigate the strength of Pakistan's
trade balance, we calculated an adjusted trade balance. This has been
done, since machinery imports are assumed to add to a country's
production potential, while other imports are assumed to be for
consumption purposes. Interestingly, we find that Pakistan's trade
balance of US$3.2bn for FY04, after adjustments for machinery imports,
becomes a trade surplus of US$900mn.
Our analysis thus shows that Pakistan's trade balance
has become strongly negative because of the high machinery import
growth, during the current fiscal year. We expect machinery imports to
continue growing as most of the Pakistani industrial sector is in the
process of either expanding its capacity or is trying to undergo a BMR.
The ongoing de-regulation in the telecom sector will also increase the
pace of machinery imports in next 2 years. At the same time, we expect
non-machinery imports to continue growing strongly as more imports are
demanded to satisfy Pakistan's growing economy. We thus expect pressure
to continue building on the rupee and see some depreciation in the near
THIS WEEK'S TOP STORIES
ARE WE HEADING TOWARDS DOLLARIZATION?
Over the last two months, the rupee has been showing
a continuous weakening against the US dollar. The causative factors
behind this development are mostly fundamental in nature. It is a fact
that returns are being normalized in almost all the investment market
segments in recent times. All these developments are pushing the
liquidity holders to find the dollar haven, as the recent changes in the
macro economic indicators are supportive of this as well. Thus the risk
of dollarization is very genuine at this juncture. There are two types
of impacts on the stock market from the weaker rupee and the resulting
dollarization. The first is related to the overall impact on the cash
liquidity available to the market and the second is the impact on the
business models of the stocks. We will confine today's analysis to the
first one while we will cover the second aspect in tomorrow's daily. We
do NOT expect the slow move towards dollarization to have any
significantly negative impact on the liquidity available to the stock
market. We maintain our earlier stance that market will keep hovering
between the 5300 - 5500 level.
RUPEE DEPRECIATION — SECTORAL IMPACTS
We are presenting the sectoral impacts. On a net
basis, we believe that all the index heavyweight sectors are likely to
get benefit from a weaker rupee. Our top picks in a weaker rupee
scenario are Pakistan Telecom and Pakistan Oilfield. Hubco is another
stock, which will get positive impact from a strong dollar.
FY04 INFLATION = 4.57%
The FBS released its FY04 inflation figures, wherein
it reported a 4.57% rise in inflation. This inflation rate was boosted
primarily by high food prices during the year on the back of wheat
hoarding. At the same time, core inflation grew by a relatively slow
3.7%, leading us to believe that the SBP will not hasten its gradual
rise in rates to combat inflation.
PRICES- PDL REDUCED ONCE AGAIN
Fears of a supply
disruption have been cited as the major reason behind the surge in oil
prices during the last fortnight. The government's hope of raising the
Petroleum Development Levy (PDL) to normal levels could not materialize
as once again the government absorbed the increase in oil prices against
the PDL. According to reports, the government has adjusted the PDL on
all the products in an effort to mitigate the impact of rising oil
prices on end consumers. However, the government might find itself in a
tight spot if oil prices continue to hold at these levels for a long
time. There seems to be no let up in oil prices and despite increased
supply from OPEC, oil prices have not fallen by much. OPEC is scheduled
to meet in the first week of August to discuss the possibility of a
further increase in oil supply, up to 500,000 barrels per day. The
problem however remains that OPEC's spare capacity is now limited. Among
the OPEC-10, Saudi Arabia is the only country that seems to have spare
production available, which is currently estimated at 1.1mn barrels per
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
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