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 18, 2005-Friday, July 22, 2005

 

 

WHO'S TRYING TO TAKE THE 'BADLA?'

If one tries playing around with the semantics, the word 'badla' could be construed for meanings that more than meet the eyes. In colloquial Urdu the word is synonymous with taking revenge while in the stock market lingo it is taken to be the interest paid on carried forward share positions. With the on-going mudslinging match taking place ad nauseam, between the SECP and the stock brokers, the former meaning seems to be the order of the day.

Karachi Stock Exchange's KSE-100 index which hit the 10,000-level in March this year has been falling ever since the SECP announced the badla phase-out several weeks ago. The index has fallen by a staggering 33.6 per cent from that peak to current levels of 7434 on Friday.

The main worry of Pakistani investors is that they would have to take deliveries of the stock so far held on badla financing when the ongoing phasing out process is completed. Since 80% of the trade is badla driven and speculative in nature, concern regarding the drying of the well (read: badla) surely sends shivers down the spine of the stock brokers.

The SECP in support with a multitude of banks has been trying to introduce margin financing to replace the legacy of badla. With confusion regarding the actual workings of margin financing and the due diligence associated with it, the KSE board last week ruled for the badla phase-out process to be frozen without further ado.

This is almost a deja vu feeling for the stock-brokers, not for the Pakistani ones, but for those on the other side of the Wagah. After a number of badla engendered stock market scams and crashes, the Securities and Exchange Board of India (SEBI) finally put the clamp on badla financing in July 2001. It was replaced by rolling settlement and derivates. The initial sentiment of the stock market was very similar to what has been experienced in Pakistan.

According to M.S Sahoo, chief general manager of SEBI, the turnover velocity of the Indian stock exchanges plunged from 448% in FY01 to 121% in FY02. But the removal of badla opened the door for equity based derivatives (futures and options) to make their move. By FY04 the annual cumulative trade had surpassed the FY01 figures by 54%. The derivatives had made their niche.

The biggest mileage gained by India out of the whole fiasco what that it managed to align itself with international standards and attract considerable foreign portfolio investment (in excess of USD 8bn for FY04). May be there is a lesson for Pakistan somewhere decoded in the Indian experience.

What instruments should be used to phase out the badla process? This question has been the biggest bone of contention between the stockbrokers and the SECP. The regulating body is adamant about the use of margin financing which the broker community believes will never bear fruition. The primary reason on the part of the brokers is that it's extremely expensive and poses hurdles due to the due diligence required on the part of the banks and other financial institutions involved. (For a detailed account on what tools were used in India, read Usman Hayat's article printed in DAWN on 23rd May, 2005)

MONETARY POLICY 1HFY06: TIGHTER

'How could I have made such a mistake as to have believed the experts'?

John F Kennedy

Some bidding pattern in the last auction, showed that investors expected that the tightening cycle is over, some even went over-exuberated, though quite irrationally, and expected rates to decline. We argued in our Daily Call, that interest rates will decline until inflationary pressures remain. The Monetary Policy Statement for 1HFY06, announced by the SBP has vindicated our stance. The SBP is likely to keep a wait and see policy in the next few months. The Monetary Policy Statement reads, 'Following the substantial increase in interest rates, inflation is expected to decelerate and come down to 8% this year'. Indeed, the SBP would want to allow the tightening of interest rates in the last six months to transmit through the monetary system. However, the Statement further states, 'While continuing to observe movement of all key variables and taking timely corrective actions, they key objective of the policy would be to fight inflation'. We had stated in our preview that these variables would be Core inflation, money supply growth and output growth (LSM Growth). Our economist, Haseeb Ahmad expects inflation to remain near the 9% level. Higher level of inflation would compel the SBP to raise the interest rates, though minimally. We expect the yields on 6m T-bill to rise by 150-200 basis points in the next 6 months.

Credit Plan: Does it matter? The money supply growth targets, set by SBP, corroborates that the Bank has not given up its hawkish posture. The Bank expects money supply to grow by 13% and targets private sector credit off-take at 20% (PkR330bn). However, we believe that the SBP would have difficulties in meeting this target (as it is targeting exchange rate stability). In FY05, as well, the SBP failed to meet its targets for monetary aggregates. It had expected Monetary Asset growth at 14.48% (PkR360bn) in the Annual Credit Plan, however, the money supply increased by 16.54%YoY, even though the SBP had raised the interest rates! Slowing down the credit-off take and monetary growth, would require further tightening of the interest rates, much more than what we expect the SBP to implement. Hence, these targets are likely to be breached once again.

Investment Strategy: The banking sector would continue to ride in on the rise in interest rates. The SBP expects lending rates, which have reached 6.57%, to further rise. As we stated earlier, we do not expect the rise in interest rates to cause a major slowdown in the on-going credit boom. The distribution of credit to private sector in FY05 shows that manufacturing sector received PkR153.bn (up 41%YoY), consumer loans increased by a massive 93.1% (PkR80.3bn), construction industry took PkR10.6bn (up 3100%YoY) from PkR331mn last year. The massive uptake in loans by the construction, cement and consumer loans indicate the asset boom in the economy. In the consumer loans category, auto-loans had the largest share of PkR37.4bn (60%), followed by house building loans (PkR17.5bn). We believe that mortgage loans can be a very attractive product for the banking sector. The rise in interest rates can have a dampening impact on the auto sector and cement sector and we remain under-weight on them.

TURN SUGAR TO FUEL

The energy supplies in Pakistan are falling increasing short of the growing demand. To sustain the economic growth of the past two years, it is imperative that infrastructure projects for energy generation are developed. Higher global oil prices, which we expect would remain on the higher side (above USD45 per barrel till 2008), require a shift in the energy mix and a reduction in reliance on oil. As an investment strategy, we believe that businesses, which invest in and search for alternative sources of energy can emerge as a growth story in the medium term. The sugar sector has the potential of generating industrial fuel and ethanol from molasses (a by-product of sugar). This fuel can be utilized as an alternative to diesel. We have initiated our coverage of the sugar sector and our Commodities and Textiles Analyst Omar Lashari, would be coming up with some value investment opportunities very soon.

FIGHT CLUB: DEMAND VS SUPPLY

On the left side of the ring, we have the ever-strong power demand, which is growing at a rapid rate of approximately 6%YoY and on the right; we have the constant supply of 15000 MW, which is struggling to pin the demand down before the final bell strikes. With the power demand expected to outrun the supply in FY06, PPIB is striving to save the country from days of extreme load shedding by allowing new power projects to be set up. Setting up of three thermal power stations is currently on its way. Local and foreign firms have submitted applications to PPIB to set up 1300 MW of thermal power stations in Lahore, Uch and Faisalabad at an estimated investment of $1 billion.

THE THREE MUSKETEERS: HYDEL, THERMAL, NUCLEAR

Hydel, being the cheapest source of energy, is the family favorite. Unfortunately, nature plays a very important role in the production of power in this case. Hydel plants depend heavily on rainfalls in the region to generate their electricity. Thus, this source does not make up the greater part of electricity generation despite being the most economical (33% of the electricity generation).

The impending rising of global oil prices has forced the non-OPEC countries to decrease their oil import bill by replacing their primary energy source with alternatives. Even financial leaders like Italy have declared a change in their energy mix due to the dependence on oil imports for electricity production. Pakistan was also seen to walk this path when the Power Policy of 2002 was released. Thus, oil that previously composed the largest share in the generation of the country's electricity has finished third in FY04 (15.7% of the electricity generation).

Finally, the race of the energy mix has been won by Gas, comprising almost 50% of the pie. The replacement of oil with gas is in the offing not just in the local industry but also globally. As pointed in the World Energy Outlook 2004, the demand for natural gas will grow most rapidly among the fossil fuels in the future, mainly due to the strong demand from power generations. According to the International Energy Agency Statistics, current gas reserves are estimated to last 150 yrs, 70 yrs longer than the oil reserves. This fact, combined with the lower cost of gas compared to oil, makes gas the ideal fuel for the transition into the new energy era.

THE RUSH TO ALTERNATIVES: SUGAR TO FUEL

Since gas prices are closely related with oil prices, they too have been on an inclining slope. The sharp upsurges in oil and gas rates have enabled the researchers worldwide invest expansively in trying to find alternative energy resources. Currently, extensive research is being done in the areas of geothermal, solar, biomass and wind energy. This area is still left largely to exploration and it will take decades, if not centuries, to determine their position in the future world energy mix. Pakistan has also joined the alternative energy fad by creating an Alternative Energy Board. We believe that there is a lot of growth opportunities in businesses, which explore alternative energy resources For example, the molasses used in the sugar sector, can be used to produce ethanol and industrial fuel. Such industrial fuel is being used in Latin American countries like Brazil. We have initiated our coverage of the sugar sector and our Commodities Analyst, Omar Lashari would be recommending some value investments to our clients.

 

 

EVENT CALENDAR

NAME OF COMPANY

Date

Event

Siemens Engineering

25-07-2005

BoD Meeting

Century Paper

25-07-2005

BoD Meeting

Unilever Pakistan

26-07-2005

BoD Meeting

Faysal Bank

26-07-2005

BoD Meeting

Honda Atlas Car

26-07-2005

BoD Meeting

Dandot Cement

26-07-2005

BoD Meeting

Pakistan Premier Fund

26-07-2005

BoD Meeting

BOC Pakistan

27-07-2005

BoD Meeting

Rafhan Best Foods

27-07-2005

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