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, July 11, 2005-Friday, July 15, 2005

 

 

INTERESTING TIMES

"May you live in interesting times," says a Chinese proverb and interesting times these are indeed. This week, the market has been trying to make sense of the diverse news flow of oil prices, Hasba bill and NSS rates. The OCAC would meet today to calculate the domestic oil price scenario. According to our discussion with OCAC, domestic oil prices can further rise by around 3-6% keeping in view the rise in international prices in the current fortnight. The other factor, which is now raising the concerns of investors, is the Hasba bill and the political situation in NWFP. Our analyst, Haseeb Ahmad has discussed the impact of Hasba bill in his write-up in this weekís Review. The market has also been debating on the impact of a rise in NSS rates on the capital market. We believe that NSS does not pose a substitution risk for the capital market and besides the temporary perception risk, it would be no-event for the market.

During the week, the KSE-100 index declined by around 1% w.o.w. Alfalah Securities Model Portfolio reported a gain of 0.05% w.o.w. For the second consecutive week, since its inception, our Portfolio has outperformed the market. For the next week, we have included Maple Leaf Cement in the portfolio, with a portfolio weight of 5%. The weight of POL has been reduced to 20%. Give me fuel, give me fire...

The OCAC members who meet fortnightly to review oil prices are to meet today. In the last meeting, the motor spirit (MS) prices were to cost PKR 3.41 more, kerosene prices up by PKR 1.55 and diesel increased by PKR 2.68. This showed a massive increase of 7.5% in MS and a jump of 9.22% in high speed diesel (HSD). The past trends of oil prices in Pakistan have seen a steady increase. The following graph depicts this scenario.

HSD and MS make up 65 % of the petroleum energy consumption and as the graphs show the prices of both are on an increasing trend. This can be owed to the fact that international oil prices have been on a rise due to supply shocks and uncertainties. The trend of these prices can be seen from the graph below. The main consumers of HSD and MS are the transport sector and thus any hike in oil prices would have a major impact on this sector. As transport is a portion of each industry this would indirectly have a cost impact on the overall industry as well. The OCAC must take this into account, looking at all linkages within the industry and the relevant impacts before making any rash unjustifiable decisions.

...THE HOUSE THAT JACK BUILT

However over the years the mix of energy consumption has seen quite a revision as there has been a shift from oil usage to alternative forms of energy such as natural gas. In 1999 the percentage of Oil consumption of the total final energy consumption was 47.7% which came down to 38% in 2004. In contrast the final energy consumption of gas went up from 31% in 1999 to 35% in 2003. The overall energy mix for the year 2004 can be seen in the following graph. In the future it would be better to shift to other forms of energy other than oil such as gas and hydro as they are much cheaper. Hydro electricity being quite vulnerable to the flow of water, main sources of energy consumption and supply should focus on gas reserves which are expected to last another 25 years, and coal which is abundantly available in the highly unexplored Thar Desert.

NSS RATES, IS IT A CAUSE OF CONCERN?

The market spent the last week, in the threat of anticipation of a rise in the interest rates on the products offered by National Savings Scheme (NSS). Some investors worried, that a rise in NSS rates could draw liquidity away from the capital market. However, we believe that NSS products cannot be a significant substitute and competing asset class with the capital market. In the day bygone, government borrowing through the NSS had crowded out most market-based investment instruments. Till 1998, the Defense Saving Certificates (DSC) offered a rate of return of as high as 18. However, under the economic reforms, NSS rates were linked with the market based Pakistan Investment Bonds (PIB), and the rates consequently slided down to the current levels of 8.15%. Since Jan-04, the NSS rates have not been revised as the government has scrapped most PIB auctions. Now, when inflation is running near double digits, the NSS instruments (most popular of which is the DSC) are offering negative real rate of return. The anticipation is that in order to facilitate the small savers, the GoP would raise the rate on DSC to up to 10%-11%. Although a decision has not been made on this, we believe that the GoP should increase the rates, as it would mostly benefit the small savers.

Now, let us discuss, why we feel that a rate revision in NSS would not be a major dampener on the market. First of all, we have repeated argued that real rate of returns matter for investment decisions. At 10-11%, the real rate of return on DSC would hardly be around 2%. Secondly, NSS has not been able to attract net inflows since the last year, as institutional investors have been barred from investment in them. Historically, institutions were major investors in the instruments. However, now each month, more institutional funds are maturing from NSS, which cannot be reinvested in the same products. Consequently, in the ten months of FY05, there has been a net outflow of PkR6.3bn from NSS as compared of slight net inflows of PkR257mn in FY04. Since, only a small fraction of the total funds in the economy can be put into NSS, we donít expect the net outflows to reverse. This view can be corroborated from the data on net investment in Prize Bonds, which are another, once very lucrative product of NSS. The net investment in prize bonds has decreased by 76%YoY in FY05 indicating that investors no longer look at NSS as an attractive investment vehicle. We advice our clients, not to feel uncomfortable and get puzzled by any rise in NSS rates, although it may create a temporary negative sentiment.

THE BILL OF DOGMA

The much talked about Hasba Bill recently passed by the N.W.F.P government has recently been doing the rounds in the financial circles. A lot of pundits believe that the approval of the bill is bound to hurt the sentiment of the market. The situation requires a closer look to infer if there would be any impact on the market, if at all.

The story would have held some truth had the KSE been lush with foreign investment.

With the major proportion of the hot money flowing in belonging to the Pakistani expatriates (who are increasingly turning away from investing in the West), there is little reason why a mass exodus of capital would take place in reaction to the news. Although, the news can have repercussions for future foreign investors eyeing Pakistan given the current spate of bombings in London; especially the involvement of Pakistani origin bombers, and Jack Strawís dissatisfaction with the madressah education. But the current lull in the market can in no way be attributed to the initiation of the Hasba (read: going back a millennium in time) Bill.

ALFALAH SECURITIES MODEL MARKET PORTFOLIO

Over the last week, the return on AlfalahSec MMP remained stagnant. The portfolio gave a return of 0.04%WoW, as compared to marketís decline of ñ1%WoW. Yet again, Alfalah Securitiesís Model Market has outperformed the market. POL continued its up-trend and increased by 2.5%WoW, closing at PkR305. The scrip is now trading at less then 15% discount to its fair value of PkR334 and we recommend a hold on it. Consequently, we are reducing our weight on the stock to 20%. We are adding Maple Leaf Cement into the portfolio, with a weight of 5%. The cash exposure has also been increased to 35%. The graphical plots of the stocks included in the portfolio are provided in the Review.

 

 

ALFALAH SECURITES RESEARCH: MODEL PORTFOLIO

 

PORTFOLIO WEIGHTS

NAME

TICKER

EQUITY WEIGHT

CURRENT PRICE

FV

UPSIDE

DIVIDEND YIELD

Equities

65

National Bank of Pakistan

NBP

30

109.35

150

37%

1.1%

   

Pakistan Oil Fields

POL

25

283.45

334

18%

4.5%

   

Maple Leaf Cement

0

5

24.24

35

44%

6.6%

   

Bank of Punjab

BOP

10

82.95

NA

NA

NA

   

Muslim Commercial Bank

MCB

10

79.1

96

21%

3.0%

   

Sui Southern Gas Company

SSGC

10

22.85

29

27%

6.5%

   

Fauji Fertilizers Company

FFC

5

121.8

160

31%

10.2%

   

Askari Commercial Bank

ACBL

5

79

137

73%

1.8%

Cash

25

 

.

. . . . .

Source: Alfalah Securities Research

MARKET THIS WEEK: BETTER THAN EXPECTED

The Index fell 53 points (0.7 %) since its closing the previous week, closing this evening at 7535.81. The average volume traded were lower than those of the previous weeksí (160 mn) showing hesitant investor sentiment. The hesitancy was induced by the uncertainty in the market and a volatile index due mainly to the uncertainty regarding the Badl a/COT issue. The SECP and the KSE board have been embroiled in a tiff regarding the abolition of the PkR. 12 bn cap which was supposed to replace the Badla phase out mechanism. The other bone of contention between the entities was the induction of 20 further scrips in addition to the 7 already existing under Badla transaction. Pakistan Oil Fields (POL), Poly Staple Fibres (PSFs) Fauji Fertilizer Bin Qasim (FFBL), Pakistan Petroleum Ltd (PPL) were the note worthy stocks.

The week began on a positive note with the news of the replacement of Badla phase-out with a cap of PkR. 12 bn, pushing the index up to 7679. However, the investors were poised to reap the profits of the 1.7 % rise seen over the previous week in the index. The market eventually closed in the negative, but with positive sentiments from the phase out abolition. POL was subject to active trading in the first half of the week, with the expectation of 30-40% bonus shares issue. The scrip gained 3.15% only to lose close to 2% of its value the subsequent day as profit taking ensued.

Though the floods are spelling economic doom for the cotton market , the PSF sector has been gaining, being a substitute for cotton yarn, the price of which is expected to hike due to supply shortage of cotton. PPL was traded actively with rumors of possible discovery in off-shore drilling. However the scrip became subject to profit taking and dipped considerably.

Apart from the SECP-KSE board tiff, the 2% hike in NSS rates also dampened the market. FFBL became highly active in the latter part of the week, with the imminent BoD meeting and a realization of higher sales figures and an overall stellar performance in the quarter. The scrip gained over two days and suffered marginally with some level of profit taking.

Outlook for the next week: Neutral. The market will be waiting for confirmation for rumours regarding extension in Badla Phase out before we see the volumes pick up and the index rise further in the absence of other catalysts. Neutral with positive undertone: The market is completely sensitive to the outcome of the SECP KSE Board meeting to take place tomorrow to decide on the abolition of the PkR. 12 bn cap placed on Badla trading and the induction of 20 new scrips to Badla. If the cap is abolished the market could see a fast paced rise in the first couple of days of the week.

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

Fauji Fert. Bin Qasim

21-07-2005

BoD Meeting

Unilever Pakistan

26-07-2005

BoD Meeting

BOC Pakistan

27-07-2005

BoD Meeting

Rafhan Best Foods

28-07-2005

BoD Meeting

Shell Pakistan

04-08-2005

BoD Meeting

Fauji Fert. Bin Qasim

21-07-2005

BoD Meeting

Unilever Pakistan

26-07-2005

BoD Meeting

 


 

PAKISTAN ECONOMICS SNAPSHOT

WEEKLY

W-3

W-2

W-1

W

 

Forex Reserves (USD mn)

12,995

12,996

13,000

 

EXCH RATE:

Exch Rate: PkR/USD

59.45

59.51

59.63

60.01

PkR/Euro

72.61

72.87

72.29

71.31

MONTHLY

FEB-05

AR-05

APR-05

MAY-05

INTEREST RATES

3m T-bill

4.70%

6.30%

7.2%

7.60%

6m T-bill

5.2%

7.10%

7.8%

7.95%

12m T-bill

5.49%

7.10%

8.3%

8.45%

INFLATION

CPI (YoY)

9.9%

10.2%

11.1%

9.8

MONEY

Currency in Circulation (YoY)

15.1%

15.1%

15.1%

Na

Deposits (PkR bn)

2155

2209

2290

2320

(YoY)

19.9%

20.1%

20.49%

19.4%

Loans (PkR bn)

1637

1657

1720

1752

(YoY)

34.5%

39.4%

37.5%

36.7%

M2 (YoY)

19.0%

19.3%

14.1%

Na

EXTERNAL BALANCE

Exports (USD mn)

1166

1356

1301

1384

(YoY)

2.6%

3.8%

Na

Na

Imports (USD mn)

1783

2143

1903

2033

YoY

-3.1%

10.5%

Na

Na

Trade Balance (USD mn)

-616.90

-786.2

-601.5

-648.7

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