CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE

 

STOCK MARKET AT A GLANCE

 

By SHABBIR H. KAZMI
Updated May 14, 2005

 

 

This week KSE-100 index opened on a positive note on the back of rumors that SECP might approve the KSE recommendation on increasing limits on futures counter. On Monday, KSE-100 index gained 258 points with PTCL and PPL leading the rally. On Tuesday, market failed to recover its early gain owing to the news flow that Central Board of Revenue might increase the CVT rate in FY06 budget. However, renewed buying in telecom, gas, banking and oil companies helped the index to bounce back on Wednesday. With the news flow of delay in Privatization of PTCL, market witnessed heavy selling pressure on Thursday. The market remained steady on the last trading day of the week. Rounding up the week, the KSE-100 index gained 228.08 points over the last week.

OUTLOOK FOR THE FUTURE

We expect the privatization hype on PTCL to be the major driver for market sentiments during next week. Reportedly, the Privatization Commission is aiming to hold bidding for 26% government stake in PTCL on June-10. We expect the positive sentiment on PTCL to spill over to other stocks as well, where we can expect a modest recovery across the board. On the risk side, any adverse news flow regarding forthcoming budget could have a negative impact on market sentiments. Our top picks for next week are Callmate, Fauji Fertilizer Bin Qasim and Pakistan Oilfields, while we also like PTCL purely as a privatization play. Fundamental Changes

THE MAJOR DEVELOPMENTS THIS WEEK WERE:

•SECP has agreed to review the Futures market rules, and has indicated that it will be inviting KSE management to discuss the proposed amendments in the rules.

•India's oil minister is due to visit Pakistan this month after which he will proceed to Iran to further discuss the $4.16bn pipeline project.

•Reportedly, the government is considering increasing rate of CVT to 0.1% from the current 0.01% in the upcoming budget.

•Pakistan Petroleum Limited initiated drilling at the Makran Coast.

•Privatization Commission has scheduled the first pre-bid meeting for NRL on 21-May-05.

•According to the newspaper reports, ICI Pakistan's polyester business is being targeted for purchase by Reliance India.

•Monopoly Control Authority has failed to take action against the cement cartel even after a lapse of two years.

•Crude oil prices fell by almost 3% after the International Energy Agency stated that high oil prices have slowed energy demand and economic growth.

•To broaden the tax net, the government is planning to impose a 5% withholding tax on transfer of property.

•As per newspaper reports, local carmakers have voiced their views on the issue of reduction in duty on imported cars in the forthcoming 2005-06 budget.

•KSE 100-Index heavy weight Oil and Gas Development Company (OGDC) is scheduled to be included in MSCI.

•As per the statement by Privatization Commission (PC), first pre-bid meeting for PTCL privatization has been scheduled for May 25, 2005.

•Warid Telecom finally launched its cellular services in Pakistan on May 12, 2005.

•The Central Board of Revenue is reportedly considering imposition of a 5% withholding tax on purchases of new cars.

•As per newspaper reports, government is likely to increase the allocation to Public Sector Development Program (PSDP) to PkR252bn in budget for FY06 compared to allocation of PkR202bn in budget for FY05.

SBP: TOUGH MONETARY MEASURES

 

 

Below is an excerpt from our recently released note on interest rates.

•We believe that current bear-flattening yield curve is unlikely to sustain.

•We expect 10-year PIB coupon to be revised to at least 10% (+200bps) in the next auction to offset the risk of high oil prices.

•With the rise of 6M T-bill cut-off yield by 150bps in Apr-05 auction, we believe that SBP has completed its aggressive monetary cycle at the short-end of the yield curve.

•In the first 10M of FY05, SBP has increased 6M T-bill cut-off yield by 511bps in order to tackle higher inflation. At the same time the long-end of the yield curve has hardly moved (Bearflattening).

•We believe that Pakistan's economy is operating at an overheated level. This is reflected in both high GDP growth and inflation.

•In our view, high credit off-take in FY04 and FY05 is largely responsible for accelerated inflation and GDP growth in FY05.

•Since SBP has increased the discount rate from 7.5% to 9.0%, there are now some indications as to the reversal of private credit off-take. However, it is too early to assume that SBP has managed to put the brakes on private credit off-take.

•Our view is that Pakistan's overheated economy will cool down with the increase in short-term interest rates. This will lead the transition of Pakistan's economic cycle from the overheat phase to stagflation.

•By Stagflation, we suggest that Pakistan's marginal GDP growth will decrease from 7.4% to 6.8% in FY06. We expect inflation to decrease as well, but with a time lag.

•On the risk side, we expect higher international oil prices to continue to be a threat for GDP growth and feed medium term inflationary expectations.

•We also expect SBP to remain vigilant in offsetting the impact of higher oil prices on the economic system.

KASB INTEREST RATE OUTLOOK

With an eye on accelerating long-term inflationary expectation and rising short-term interest rates, we are not ruling out the possibility of another hike of atleast 100bps in the discount rate to 10% from 9%. We also believe that current bear-flattening yield curve is unlikely to sustain. We expect 10-year PIB coupon to be revised to atleast 10% (+200bps) in the next auction to offset the risk of high oil prices. With the cut off yield on 12M T-bill reaching 8.25%, the differential between the 12M T-bill and discount rate has narrowed down significantly. Thus, at the existing discount rate, banks would not be penalized in the real sense for approaching the discount window.

 

THIS WEEK'S TOP STORIES

CALLMATE TELIPS — STRIKING GOLD WITH LDI

Potential upside of 106% emanating from (i) turnaround in profit potential with LDI platform, manifested as expected jump of over 1000 basis points in gross margins and expectation of 50% compounded growth in bottom line over FY04-09, (ii) untapped potential in the telecom sector, and (iii) astute management coupled with not-so-impressive competition, compel us to recommend a BUY on Callmate Telips Telecom Limited with a DCF based target price of PkR68/ share.

PAKISTAN — A MAJOR REGIONAL CEMENT EXPORTER

We are skeptical about the likelihood of Pakistan becoming a major cement exporting country in regional markets. Our view is based on three factors: (I) Iran, the most inexpensive cement producer is expanding its production capacity to 75mn+ tons from 32mn tons, which would be major threat to Pakistani exports to Afghanistan; (II) we do not have bulk loading facilities to ship huge cement quantities to Middle East and South East Asian Countries while Middle East countries are planning to double their capacities in the next two years; (III) cement exports to India are possible, but expansions by Indian cement companies remain a threat.

PSF: HOW LONG WILL THIS TROUGH LAST?

The last 9 months have been hellish for PSF producers both locally and on the international front. Cornered by global PSF oversupply yet raw material shortage, high petrochemical prices and an ample supply of a cheap substitute in the form of cotton, they have been hit from all sides. However, we opine that this trough though deep will not be sustained over a longer period and expect a gradual recovery to set in after the budget.

SBP STEERING MONETARY POLICY— WHAT NEXT?

With an eye on accelerating long-term inflationary expectation and rising short-term interest rates, we are not ruling out the possibility of another hike of atleast 100bps in the discount rate from 9% to 10%. Added to this, in the auction held yesterday, SBP raised the cut-off yield of both 3M and 12M T-bill by 99bps to 7.38% and 8.24% respectively. We believe that SBP's initial target is to control the unprecedented private credit growth.

In the first 9M of current fiscal year total private credit was recorded at PkR362bn, which is higher than full year monetary expansion target of PkR360bn. Our view is that higher private credit off-take has been largely responsible for higher inflation in FY05. Steering monetary policy when growth is rising and prices are accelerating is never easy. One should expect more surprises going forward.

SENSITIVE PRICE INDEX- TAPERING OFF

Sensitive Price Index (SPI), a measure of inflation more skewed towards food prices, has shown a declining trend in past three weeks. We are of the view that a declining trend in SPI that comprises of 53 essential items (most of them are food items) can be viewed as a leading indicator for the Consumer Price Index. According to the data released by Federal Bureau of Statistics (FBS), SPI declined by 0.73% from Apr-14 to week ending on May-05. We expect food inflation to come down in the remaining part of the fiscal year owing to the bumper wheat crop in FY05. This coupled with government's decision to allow duty free import of 5 essential food items will reduce food prices in the months to follow. We expect CPI inflation to reach 8.5% in FY05.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

34.00

34.88

2.59%

Avg. Dly T/O (mn. shares)

192.82

400.95

107.94%

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

314.22

705.48

124.52%

No. of Trading Sessions

5

5

21

KSE 100 Index

7183.25

7411.33

3.18%

KSE ALL Share Index

4745.64

4868.58

2.59%