The market in general lacked confidence and there
was a mixed trend during the week in light of the continuing
liquidity problems and the COT issue. On Monday, the market opened
on a positive note due to the COT phase out suspension news, but the
gains were short-lived, as the cap on Badla financing disappointed
the investors. In the absence of margin financing, market remained
under pressure on Tuesday as well. However, the market witnessed a
sharp decline on Wednesday owing to the rumors regarding PPL's
offshore discovery failure. On Thursday, market staged a marginal
recovery as the investors were expecting the availability of
parallel financing options. On the last trading day, investors
remained on the sidelines due to the KSE-SECP standoff. However, the
market witnessed stock specific activity during the last session, as
board meetings of the listed companies are around the corner. On the
whole, KSE-100 Index shed 53 points over the last week.
OUTLOOK FOR THE FUTURE
The result of the KSE-SECP tussle will determine
the direction of the market. The standoff between the KSE and the
SECP is a technical hitch and will provide some buying
opportunities. FFBL's Board Meeting is scheduled for the 21st of
July and the company would announce its half yearly results. Focus
on fundamentally sound stocks with a bias towards Callmate Telips,
NBP, POL, Packages and the Faujis. Fundamental Changes
The major developments this week were:
*Since SSGC is curtailing gas supply from
05-Jul-05 to 16-Jul-05 for annual maintenance of Bhit Gas Field,
FFBL's management has decided to partially shut down its urea plant
for the remaining period while the DAP unit will remain fully
*Money supply growth was recorded at 16.98% for
FY 04-05 as compared to 17.20% last year.
*According to a news report, State Bank of
Pakistan (SBP) will release its monetary policy statement for 1HFY06
on July 21.
*Cement exports dropped by 1400 tpd to 3600 tpd
during the first 10 days of FY06 owing to shortfall in domestic
market, which offers better margins than exports.
*Pakistan State Oil awarded the tender for import
of furnace oil (FO) to Fal Oil of Sharjah.
*The production and sales of autos recorded an
increase of 28% and 32% respectively during FY04-05. *??Pakistan is
to be given GSP status from January 2006.
*The offshore drilling at Pasni is continuing and
rumors on Pakistan Petroleum Limited hitting a dry well at Pasni
*The government has decided to maintain urea
prices at PkR475/bag by providing PkR4.7bn subsidy.
*The State Bank of Pakistan (SBP) has restricted
commercial banks and DFIs the use of personal loans and credit lines
for subscription of Initial Public Offerings (IPOs).
*Discussions held in New Delhi have given a green
signal to the Pakistan-India-Iran gas pipeline and work is slated to
commence in April 2006.
*As a result of record-high oil prices,
Pakistan's oil import bill has increased by 31.25% (US$1.015bn) in
FY05 to US$4.215bn against FY03 import bill of US$3.2bn.
*As a result of heavy rains and floods
approximately 0.269mn acres of cotton crop in Punjab (4% of
provincial cultivated crop area) have been destroyed.
*KSE announced that COT financing on seven stocks
would continue without any caps, whereas COT financing would be
extended to the remaining 20 additional stocks being traded at the
futures counter at a later date. The SECP in its reply termed the
decision taken by KSE as illegal and incapable of implementation.
NSS RATES TO GO HIGHER!
In a rising interest rates scenario, we expect
rates on National Saving Scheme (NSS) to be revised upward shortly.
Investors are currently getting a negative return on NSS owing to
high inflation (9.33% in FY05). Currently, rate of return offered by
Defense Saving Certificates (DSC's) and Behbood Saving Certificates
is at 8.15% and 10.18% respectively. Dr Ashfaque Hassan Khan
(Director Debt office) has also indicated that the Ministry of
Finance (MoF) is planning to raise the rate of return on NSS, which
will be effective from Jul 05. The MoF had linked the NSS rates with
the cut-off yields on Pakistan Investment Bond (PIB) under the
guidelines of International Monetary Fund. We believe that the
Ministry is facing some difficulties in revising the NSS rates in
the absence of PIB auction. In the last fiscal year, three PIB
auctions were held and all of them were rejected owing to the high
rates demanded by the primary dealer. In the recent budget, the
government has raised the budget deficit target to 3.8% (from 3.2%
in FY05), which will be financed through the privatization proceeds
and international grants. Given the government's intention to
finance its budget deficit through privatization proceeds, we expect
the supply of the PIB is likely to remain limited in FY06 as well,
keeping a check on PIB yields going forward.
PAKISTAN TEXTILES: A MIXED BAG!
Although we expect significant growth in the
textile sector with the start of the new fiscal year, we do not
anticipate this growth to be evenly distributed across the board.
The removal of textile quotas from January 2005 has admittedly given
rise to a huge opportunity set. The relevant question at this point
is, who will rise to the occasion? The budget has enhanced capital
expansion opportunities for the sector by scrapping sale tax from
the entire chain of textile raw materials as well as marginalizing
import duty on raw materials and textile machinery. However the new
free trade order could potentially hurt the companies operating
without the backing of established export market customers or with
higher conversion costs by exposing them to competition from
relatively cheaper textile producing countries such as Sri Lanka and
Bangladesh. Considering these factors we maintain a liking for
Nishat Mills and Nishat Chunian.
SBP TO MAINTAIN 'NEUTRAL' STANCE IN 1HFY06!
We expect SBP to continue following a 'neutral'
monetary policy stance in 1HFY06, which will be aimed at combating
inflation and maintaining output growth at its potential level.
However, the language of the forthcoming monetary policy statement
will remain the key to ascertain SBP's intention of changing the
discount rate in the months to follow. During the first half of
FY05, SBP has followed an expansionary monetary policy to stimulate
growth. In an expansionary monetary regime, interest rates remain
below the 'neutral' rate, which in turn fuel a tendency for credit
and investment to undergo a cumulative expansion, boosting the
economy and prices. However in 2HFY05, SBP changed its monetary
stance to neutral from accommodative to combat inflation without
affecting the growth potential of the economy. Cut-off yields on 6M
paper has increased by 592bps in FY05. However, the impact of
tightening has not been visible, so far. This intricate a question
what a neutral rate would be?
INFLATION — TRENDING DOWNWARDS....
Following s bumper wheat crop and government
measures to allow import of essential food items, food inflation has
eased off in the month of June-05. According to the data released by
Federal Bureau of Statistics (FBS), inflation for the month of June
was recorded at 8.74% (down from 9.84% in May-05). We believe that
the high base effect also played a pivotal role in containing the
inflation. Food inflation (carrying 40.32% weight in CPI) was
recorded at 9.3% (down from 12.5% in May-05), followed by Housing
Rent Index (HRI) 12.0%, and fuel inflation at 4.6%. However,
transport inflation (13.6%) remains at higher end, owing to the
increased public transport fares. In FY05, total headline CPI
inflation was recorded at 9.28% (up from 4.57% in FY04). At the same
time core inflation was recorded at 7.62% (up from 3.72% last year).
In the wake of higher inflation, SBP changed its monetary stance
from 'accommodative' to 'neutral' in 2HFY05 and since then has
raised the 6M cut-off yield by 592bps. With the tightening in 6M
T-bill rates, real interest rates have entered into the positive
zone. This indicates that the short-term interest rates have peaked
KSE- TECHNICAL HITCH, FUNDAMENTAL ARE INTACT
While the standoff between KSE and SECP lingers
on, we believe that this is a technical hitch and could potentially
throw up some buying opportunities. We maintain our selective
stock-picking stance where Pakistan Oilfield, National Bank of
Pakistan, Callmate Telips, Fauji Fertilizer Company and Fauji
Fertilizer Bin Qasim are our top picks. We firmly believe that the
current standoff between the KSE and SECP will eventually be sorted
out. In the latest development, the Board of Directors of the KSE
announced that COT financing on seven stocks would continue without
any caps, whereas COT financing would be extended to the remaining
20 additional stocks being traded at the futures counter at a later
date. The SECP in its reply termed the decision taken by KSE as
illegal and incapable of implementation. While the short-term
performance of the market is likely to be subdued owing to the
ongoing issues, we advise a selective stock picking strategy.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
KSE ALL Share Index