CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. PAKISTAN WEEKLY REVIEW
 

 

PAKISTAN WEEKLY REVIEW

 

AlFalah Securities (Pvt) Ltd.
Monday, June 6, 2005-Friday, June 10, 2005

 

 

INVESTMENT STRATEGY: OF BUDGET AND WEDNESDAYS

A few years ago, CLSA, conducted a comparative analysis of different Asian economies using the macro-stress indicator. If today, someone repeats the exercise of ranking Pakistan using macro-stress indicators, the economy would be ranked as a duck! The expansionary budget is being heralded as being investment-friendly and growth conducive. However, as we discussed in our budget report, we believe that the budget and expansionary fiscal policy can derail the economy from its long run growth path. The monetary policy and fiscal policy seems to be at opposing ends, as the central bank has been pursuing a tight monetary policy in order to iron out inflation while the fiscal policy is threatening to further exacerbate the over heated economy. A rise in the fiscal deficit, which seems imminent after the current budget, would lead to higher levels of inflation and interest rates and would lead to further accumulation of external debt.

We believe that the tax revenue target of PkR690bn is too hard to achieve given the tax exemptions, which the government has granted. Furthermore, the cabinet did not approve the 7% tax on bank fees and 6.5% WHT on auto-sector, which would further reduce the tax revenue collected. We expect inflation to remain in the range of 8-10% in the next fiscal year and correspondingly interest rates would also remain around 8.5%-9% (6m-Tbill) until inflation is not curtailed. The textile sector was the major beneficiary of the budget, while the banks also benefit from a 3% reduction in effective tax rate. We believe the budget was neutral for auto, telecom, fertilizer, oil and gas sector and its impact should be positive for the power and cement sector. Consequently, after the budget, Nishat Mills (textile) was up 10%, in the banking sector, National Bank of Pakistan was up 4.5% and in fertilizer sector Fauji Fertilizer increased by 1.6%. The market still hangs on the news flow on privatization of Pak Telecom. We believe, the issue would still take sometime to settle down and it would be difficult to privatize the entity by the end of the month.

We, at Alfalah Securities, did some data mining on equity data and found an interesting observation: During a week, the volumes are highest on Wednesday and are lowest in Monday and Friday, while the largest change in KSE-100 index is mostly on a Tuesday.

MACRO-STRESS

The fiscal budget FY06, failed to impress Standard & Poor from improving Pakistan's credit rating. The agency expects, lose fiscal policy to further strengthen inflation and amplify over-heating of the economy. Indeed, the view is in-line with our stance on the budget. However, the market continues to label the budget as growth friendly. Even more surprising are comments from some segments that the budget would help control inflation! The budget announced 15% increase in the wages of government employees, 10% rise in pensions, increase in minimum house rent, and is excessively expansionary. All of these factors would be directly feeding to higher levels of inflation. It should not come as a surprise that even the SBP expects inflation to remain at around 8% in FY06. Investors should realize that there is an inherent trade-off between low inflation and economic growth (unemployment or output gap, as Phillips Curve puts it). Higher levels of economic growth would lead to higher inflation and consequently, curbing inflation would require slowing down the economic growth.

In the US Paul Volker, the Governor of the Fed Reserve is famous for engineering a recession in the economy in the 80's, which ironed out inflation. Then when inflation was curbed, Volker used his monetary policy to steer the economy into a boom. Hence, if the budget tries to boost growth from the current levels, it should spell bearish expectations for a rational investor. We expect the long-terms yields to rise and expect the coupon rate on the 10-year PIB to increase to 11% by July-FY06. A steeper yield curve is indicative of the inflationary expectations in the economy.

SUPERIOR ASSET CLASSES

The Bull Run in the real estate market would continue to go on. It was widely anticipated that the government would impose some kind of tax to curb the excessive speculation in this asset. However, now when this has not materialized and inflation is still on the higher side, real estate is expected to continue on a bull run. The National Saving Schemes (NSS) would regain their attraction as their rates are expected to increase to around 10% due to the rise in the 10-year PIB rates. In the equity market, commodities whose sales (and profitability) is cyclical with the economic growth and where the producers can pass on the higher prices to the consumers should outperform. Banking sector, cements and commodities like gold and oil should benefit from higher inflation.

THE WEDNESDAY FACTOR

At Alfalah Research, we did a little data-mining exercise and found some interesting finding. During a week, the volumes tend to peak out on every Wednesday. For our analysis, we used daily price data for the last six months. On average, the largest volumes are on Wednesday, while the volumes are lowest on Mondays and Fridays. This variation can be explained since the investors might only have a clear view about the market strategy during the middle of the week and would remain unclear on Mondays, when the week begins. High volatility in the market might be another factor, which would keep investors away from the market at the start of the week.

THE MARKET THIS WEEK

The market closed at 7345.29, up 2% since last week's closing at 6467. The week was dominated by the budget expectations and then the budget outcome, Pakistan Telecommunication Ltd. (PTC) was also dominant with the union-government tiff becoming increasingly palpable. Other major aspects of the week were the initiation of the phasing out of COT/ badla and the 3-month, 6-month and 1-year T-bill auction. The average trading volume remained comparable with previous weeks' average volume and the value traded (USD 455mn) was also in the average band.

The week began on a negative note with the market shedding 108 points (1.5%) due to the delay notice in PTC's privatization, with PTC shedding PkR. 3.25 in the day.

The market also remained apprehensive of the possible increase in CVT from 0.01% to 0.1%. However, all fears were dispelled with the announcement of the budget which was considerably positive for investment prospects. The index saw a 4% hike, with almost all stocks closing 5% up, including PTC which had been clouded by the dim privatization prospects. The investors then took to profit-taking reaping the fruits of the tremendous hike observed subsequent to the announcement of the budget and the index took a dip with trading volumes on the heavy side (as is the case on all Wednesdays). The downward trend was also attributable to the phasing out stage of COT/badla which was initiated on June 08. The market also observed the marginal increase in interest rate indicative of the peaking out stage.

The market closed on a slight positive the next day with PTC gaining focused support from particular quarters in the market. The price behaved contrary to expectations.

With the seemingly poor prospects of privatization and aggravation of the union government crisis, a price hike was least expected. Furthermore there was no concrete positive on PTC news in the market to merit price hikes consecutively for the last two days of the week.

OUTLOOK: Neutral: The market is vulnerable to any major news on the PTC front.

 

 

Please review the attached event calendar, as the investor community will be keeping an eye on the corporate announcements in the coming week.

EVENT CALENDAR

NAME OF COMPANY

DATE

EVENT

Kohinoor Energy

10062005

BoD Meeting

Pakistan Income Fund

04072005

BoD Meeting

Pakistan Stock Fund

04072005

BoD Meeting

Pakistan Stock M. Fund

04072005

BoD Meeting

 


 

PAKISTAN ECONOMICS SNAPSHOT

WEEKLY

w-3

w-2

w-1

w

 

Forex Reserves (USD mn)

12,766

12,995

12,996

13,000

Exch Rate: PkR/USD

59.45

59.51

59.63

60.01

PkR/Euro

76.70

76.82

77.44

77.08

PkR/Yen

0.55

0.56

0.57

0.57

MONTHLY

Jan-05

Feb-05

Mar-05

Apr-05

Interest Rates

3m T-bill

4.14%

4.70%

6.30%

7.2%

6m T-bill

4.8%

5.2%

7.1%

7.8%

12m T-bill

4.96%

5.49%

7.10%

8.3%

Inflation

CPI (YoY)

8.5%

9.9%

10.2%

11.1%

Money

Currency in Circulation (YoY)

15.5%

15.1%

15.1%

na

Deposits (PkR bn)

2,143

2155

2209

na

(YoY)

20.2%

19.9%

20.1%

na

Loans (PkR bn)

1590

1637

1657

na

(YoY)

35.9%

34.1%

34.5%

na

M2 (YoY)

20.5%

19.0%

19.3%

na

External Balance

Exports (USD mn)

1121

1151

1194

na

(YoY)

24%

2.6%

3.8%

na

Imports (USD mn)

1668

1616

1786

na

YoY

11%

-3.1%

10.5%

na

Trade Balance (USD mn)

-547

-465

-592

na

YEARLY

2000

2001

2002

2003

2004

GDP (USD bn)

60.33

58.51

63.35

67.70

69.07

GDP growth

4.13%

1.84%

3.10%

5.11%

6.40%

Agricultural Growth

1.95%

-2.2%

0.1%

4.1%

2.6%

Services Growth

3.09%

4.76%

5.30%

5.24%

5.49%

Manufacturing Growth

3.73%

9.3%

4.5%

6.9%

13.4%

Population (mn)

140

143

146

148

149

GDP per capita (USDmn)

429.7

408.6

433.9

457.4

463.6

Trade Balance

Imports (USD bn)

9.602

10.202

9.434

11.333

15.47

YoY

-0.1%

6.2%

-7.5%

20.1%

36.5%

Exports (USD bn)

8.19

8.933

9.14

10.889

12.27

YoY

8.8%

9.1%

2.3%

19.1%

12.7%

Trade Balance (USD bn)

-1.412

-1.269

-0.294

-0.444

-3.2

Current Account (USD bn)

-1.143

-0.513

1.33

3.16

1.73

Remittances (USD mn)

983

1087

2389

4236.85

3800