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 20, 2005-Friday, June 24, 2005

 

 

INVESTMENT STRATEGY: PRIVATIZATION FIZZLE

There was huff and puff, but not enough to blow the market away. The steam from privatization of Pak Telecom failed to drive the engine of the market. Although PTCL's bidding price at USD2 per share is much higher than the current market price, the scrip has failed to attract as much attention as was expected. In our last weekly we advised our clients to stay away from the privatization risk associated with the scrip and the market behavior over the last week has vindicated our stance. The issue of COT phase out has kept the grim grip on the market. The volumes have remained dry as most funds are waiting for the 30th June year closing. So now what? Would the market remain as dead as a tomb or is this the lull before the storm which would take the index to new highs? In our view, which we have been beating emphatically since the last few months is that the market would remain range bound till the issue of COT phase out persist. This means that bears are likely to remain strong until Aug-05. The investors should utilize this phase for accumulation of value stocks. Our recommendations remain National Bank of Pakistan, Pakistan Oil Fields, Fauji Fertilizers and Pak Suzuki Motors. This portfolio would ensure that the investment is diversified in the four growth sectors of the economy i.e. banking, oil, fertilizers and automobiles.

THINK GROWTH

Those who are familiar with the script of Pakistan's economic performance would feel comfortable with the growth story. The growth in pent up consumption demand has been outpacing supply during the last couple of years, leading to both increase in the price levels and sales of most sectors of the economy. We think this demand, which was initially driven by low interest rates, would be sustained in the next year due to growth in purchasing power (the wealth effect). Take the fertilizers sector for example. Last year, the supply fell short of demand by around 1mn tones. As a result the prices of urea have increased by 11%YoY in July-May FY05 while the sales have increased by around 5.6%YoY. The demand-supply gap in the auto-sector is well known to most, as most consumers have to wait for around 5-6 months just to purchase a car! Consequently, auto-sales have been at a massive 50%YoY and the prices have also gone up. This growth and the demand-supply gap is also evident in the banking sector. The advances growth has been outstripping deposit growth since the last year. The advances have been growing at around 34%YoY, while deposits have growth by 20%YoY. Consequently, the net interest income of most banks has been bloated with improvements in spreads and growth in earning assets. We would discuss this growth story in our upcoming Green and White, June 2005. Similarly, in the oil sector as well, we have seen a massive growth in international price level and volumetric growth in domestic demand. Hence the whole economy has been growing due to an increase in aggregate demand with the supply remaining rigid.

This story of demand outstripping supply would remain intact until supply additions come online or if inflation bites into demand by eroding purchasing power. The likelihood of both these events occurring in FY06 are very low.

INVESTMENT STRATEGY: ACCUMULATE VALUE STOCKS

Our investment strategy derives from this top down approach and our macro-view. We are over-weight on sectors, which have growth stories and where the profitability would be driven by growth in core income. As we mentioned earlier, we like, the banking, fertilizer, automobile and oil and gas sector. Although telecom has been under highlight, we feel that the demand in the sector (especially in the cellular market) is nearing saturations levels. The price wars in cellular and wireless are an example of this saturating market. We like sectors where we expect both an increase in pricing and sales growth. Our investment basket includes: National Bank of Pakistan (NBP, Fair Value: PkR150), Pakistan Oil Field (POL, Fair Value: PkR334), Fauji Fertilizer (FFC, Fair Value: PkR160) and Pak Suzuki Motors (PSMC: under-review). This investment basket is well diversified and is only into value investment. We avoid risky and volatile investments options like PPL, OGDC and PTCL. Accumulation of value stocks remains our preferred investment strategy.

LULL BEFORE THE STORM

The phasing out of COT remains the biggest dampener on the market. The market is likely to remain range bound till Aug-05, until margin finance replaces COT. The other reason why the market has been unable to attract much volumes is that most funds are waiting for the year closing on 30th June. These funds are likely to take new positions on the market in the next month. Hence this hibernation time seems ideal for accumulation of value stocks, which we have highlighted above.

As observed last week the market behaved counter expectation, oscillating through the week. This week, the KSE-100 shed a nominal 48.28 points , closing at 7350.45. The volumes picked up from last week hanging at 232 mn, but remained lower than the previous weeks' averages. The highlight of the week was the conclusion of the Pakistan Telecommunication Ltd (PTCL) privatization, with Etisalat picking up 26% of the company at USD 2.59 bn. The market also remained susceptible to the liquidity crunch induced by the COT/ Badla phase out and the lag in margin financing induction. The week also saw a hike in oil prices with markets world over reacting negatively.

The week opened with the index rising 267 points (3.6 %) as the market basked in the privatization glory. The positive sentiment pulled most of the major stocks up by 5%. In particular, Pakistan State Oil (PSO), Oil and Gas Development Company (OGDC) saw a rise in trading volumes. The following day the investors reaped the gains of the previous day and index lost 172 points (2.25%). The downward trend has since continued with the market shedding points continually, though not drastically. The market was also blanketed in negative sentiment due to the show-call notice issued to some brokerage houses regarding the excessive activity of some large brokerage houses in badla trading. These houses had failed to phase out their badla volumes at the rate prescribed by SECP and consequently were crowding out the smaller brokerage concerns. The cement sector saw some activity with the government remaining adamant on the building the controversial Kalabagh Dam and Bhasha Dam. The institutional activity remained dim due to the closing of the current fiscal year. The index saw some respite on Thursday when it was rescued from a 260 point plunge by the rumour that the COT/Badla market may run parallel to the regular market until the Badla is phased out.

This week the much anticipated privatization of PTC was observed and the consequent hike in the index. However, the hike could have been greater had it not been hampered by the COT/ Badla issues. We expect the Badla issue to keep the market subdued. We also observed the market brave the 7500 level which it crossed with large volumes (relative to the previous week's, but average compared to previous couple of months' volumes) yesterday, however staying true to the past record, the market has met with constant resistance at the 7500 level.

It would also be wise to see the privatization in isolation. Though we expect the liquidity rise to boost the market, some lag between the realization of the liquidity and its impact is expected. This liquidity is hoped to counteract the problems created by the COT/ Badla phase out, however the market will take some time to adapt to margin financing. We see the market range bound in the short term. Once margin financing takes a strong foot hold in the industry and the PSO privatization proceedings are initiated, the market will rise with strong volumes.

OUTLOOK: Neutral to Positive. The market will up in activity after June 30.

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

Atlas Honda

28062005

BoD Meeting

Abbott (Lab)

30062005

BoD Meeting

Pakistan Income Fund

04072005

BoD Meeting

Pakistan Stock Fund

04072005

BoD Meeting

Pakistan Stock M. Fund

04072005

BoD Meeting

Unilever Pakistan

26072005

BoD Meeting

Rafhan Best Foods

28072005

BoD Meeting

 

 

 


 

PAKISTAN WEEKLY REVIEW
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

Feb-05

Mar-05

Apr-05

 

3m T-bill

4.70%

6.30%

7.2%

6m T-bill

5.2%

7.1%

7.8%

12m T-bill

5.49%

7.10%

8.3%

Inflation

CPI (YoY)

9.9%

10.2%

11.1%

 

MONEY

Currency in Circulation (YoY)

15.1%

15.1%

na

   

Deposits (PkR bn)

2155

2209

na

(YoY)

19.9%

20.1%

na

Loans (PkR bn)

1637

1657

na

(YoY)

34.1%

34.5%

na

M2 (YoY)

19.0%

19.3%

na

External Balance Exports (USD mn)

1151

1194

na

(YoY)

2.6%

3.8%

na

Imports (USD mn)

1616

1786

na

YoY

-3.1%

10.5%

na

Trade Balance (USD mn)

-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%

Interest Rates 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