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
7. SECP REPORT

 

PAKISTAN WEEKLY REVIEW

 

AlFalah Securities (Pvt) Ltd.
Monday, Aug 01, 2005-Friday, Aug 05, 2005

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Shell Gas LPG (Pakistan)

08-08-05

Mon

The financing arrangements of the Company.

Meezan Islamic Fund

10-08-05

Wed

Annual Accounts for the year ended June 30, 2005.

Meezan Balanced Fund

10-08-05

Wed

Annual Accounts for the year ended June 30, 2005.

Adamjee Insurance Co. Ltd.

10-08-05

Wed

Half Yearly Accounts for the year ended June 30, 2005.

ABAMCO Capital Fund

13-08-05

Sat

Annual Accounts for the year ended June 30, 2005.

ABAMCO Growth Fund

13-08-05

Sat

Annual Accounts for the year ended June 30, 2005.

ABAMCO Stock Market Fund

13-08-05

Sat

Annual Accounts for the year ended June 30, 2005.

ABAMCO Composite Fund

13-08-05

Sat

Annual Accounts for the year ended June 30, 2005.

EFU Life Assurance Ltd.

13-08-05

Sat

Annual Accounts for the year ended June 30, 2005.

EFU General Insurance Ltd.

13-08-05

Sat

Annual Accounts for the year ended June 30, 2005.

PICIC Commercial Bank

13-08-05

Sat

Half Yearly Accounts for the year ended June 30, 2005.

P.I.C.I.C.

15-08-05

Mon

Half Yearly Accounts for the period ended June 30, 2005.

Lakson Tobacco Co. Ltd.

15-08-05

Mon

Annual Accounts for the year ended June 30, 2005.

Colgate-Palmolive (Pakistan) Ltd.

19-08-05

Fri

Annual Accounts for the year ended June 30, 2005.

Hinopak Motors Ltd.

22-08-05

Mon

Half Yearly Accounts for the period ended June 30, 2005.

Bata Pakistan

24-08-05

Wed

Half Yearly Accounts for the year 2005.

 

 

KSE-100 WEEKLY MARKET PERFORMANCE

Source: Alfalah Securities Research

MARKET FOCUS
THE FINANCING BLUES
[By Haseeb Ahmad; haseeb@alfalahsec.com; (9221) 9217825]

With the Continuous Fund Supply rumored to be in place, a parallel market for loanable funds would be working simultaneously and in tandem with the regular market. This way the investors would be apprised about the funds availability on real-time basis. Furthermore, the verification of securities would be necessary before the trade. Many modalities and the issues associated with the actual implementation still need to be worked out for instance the lender of last resort in the CFS system hasn't been decided upon yet, in addition to it the actual form of financing whether in the shape of securities or cash is anybody's guess.

The market is rife with news regarding a multitude of issues relating to the elimination of the double margin requirement on margin financing to enhancement in COT financing limit to launch of a new financing product called Continuous Fund Supply.

None of the above proposals mentioned above has reached any tone of finality and the market continues to flounder, feeding indecisiveness abound.

Pundits suggest that removal of double margin requirement is one issue that is inevitable. Dr. Salman Shah after the Saturday meeting, last week, stressed that the double margin requirement would be done away within the next 48 hours barring the final seal of approval from the SECP.

One product that has been making headlines lately is the Continuous Fund Supply. This mode of financing is tipped very heavily to replace the current Badla / COT mechanism, although many market players suggest that CFS is only a modified form of COT.

THE CURRENT REGIME...

"Badla" is termed as "a transaction where the Borrower, in order to avoid funding/delivery for a purchase/sale transaction, carries forward his security exposure from the current settlement cycle to the next settlement cycle by sale in the present week and repurchase in the subsequent settlement week at a predetermined differential price".1

FACTORS THAT MATTER...

The key factors influencing Badla rates are

1. Overbought and oversold conditions: Demand and supply conditions stemming from the market's oversold or overbought position acts as a key determinant of the badla type and rates.

2. Money market liquidity positions: A strong correlation exists between money market liquidity and badla rates. This is due to a significant part of excess funds in the money market spilling over to the stock market.

3. Market Sentiment: The sentiments play a key role in determining the rates. At times of high investor confidence (or may be irrational exuberance) majority of the investors want to take delivery of the stock. This factor deflates the total demand for rollover of funds and eventually badla rates decrease. On the other hand, in times of higher uncertainty (or unjustified pessimism) the increased rollover of funds crops up badla rates.

CFS: A MODIFIED VERSION OF COT?

Under the current mechanism, the Badla market opens after the regular market is done with its dealings. Investors with leveraged positions in the regular market go to the badla market in search for financing. With the CFS in place a parallel market for loanable funds would be working simultaneously and in tandem with the regular market. This way the investors would be apprised about the funds availability on real-time basis. Furthermore, the verification of securities would be necessary before the trade. Many modalities and the issues associated with the actual implementation still need to be worked out for instance the lender of last resort in the CFS system hasn't been decided upon yet, in addition to it the actual form of financing whether in the shape of securities or cash is anybody's guess.

CONCLUSION:

The biggest gainers would be the small and retail investors who would not be at the mercy of big badla lenders and more cognizant about their risk exposures. Furthermore, the liquidity problems currently plaguing the stock market (Shaukat Tarinís report suggests that an injection of PKR30bn is required) would be dealt with in a positive manner. The future of the market; many detractors may disagree, looks rosy in the near future.

ECON FOCUS

INTEREST RATES: HEADING NORTH?

[By Ali Farid Khwaja; alifarid@alfalahsec.com; (9221) 9217825]

We expect another 100 basis points of tightening in the short end of the yield curve in 1hFY06. Core inflation should average near double digits in the next six months, putting pressure on interest rates. Contrary to perception, inflation is good for most financial securities and the capital market can provide a good hedge to rising inflation. The oil, fertilizer, cement, automobile and banking sector would benefit from a rise in inflation.

INTEREST RATES: UP AGAIN

The last auction vindicated our stance that interest rates are going to trend higher, though at a moderate pace. Although the market consensus expected interest rates on the short term duration to head down, we expect that there is still around 100 basis points of tightening left in the short end of the yield curve. In the auction, the SBP mopped up PkR58bn against a target of PkR75bn and participation of PkR91bn. The yields increased by 10-15 basis points, inline with our forecasts and reached 7.83% on 3m paper, 8.09% to 6m T-bill and 8.79% on 12m T-bill. With core inflation at around 9% (June-05), the real interest rates are still negative and money supply growth remains unabated.

MONEY SUPPLY GROWTH

The impotency of the tightening regime, which the SBP has maintained over the last year, is reflected from the following indicators; advances growth of the banking sector have increased by 36%YoY in Jan-May-05, as compared to 23%YoY in the same period last year, the advances to deposit ratio stands as high as 75% in May-05 and money supply increased by 16% against a target of 14% set in the Annual Credit Plan FY05. With the unabated rise in real estate, fueling the consumption appetite, we believe that the tightening would not suffice to control credit growth.

INFLATION LINGERS

Money supply growth remains unabated, output expansions in manufacturing industries are still in the pipeline, real estate bubble continues to expand and oil prices are on the rise. With these developments, it would be difficult and na‘ve to expect that inflation can be brought down. We expect core inflation to reach double digits in the next six months. Whereas, the CPI shows signs of tapering off, core inflation has never weakened.

INFLATION AND FINANCIAL SECURITIES

Besides, the real estate, the capital market provides the best hedge against rising inflation. Although investors have usually disliked inflation, the KSE provides exposure in many sectors, which can be possible inflation hedges. The oil (ENP and OMC) sector is an obvious beneficiary of rising oil prices. We have included Pakistan Oil Field (POL) in our portfolio from the oil sector. All those industries, where supply is running short of demand, benefit from rising inflation. The cement, automobile and fertilizer sector, all have enough pricing power, to pass-on a greater increase in prices to the consumers and hence improve their margins. Our Model Portfolio contains, Maple Leaf Cement (MLCF) from the cement sector and Fauji Fertilizers (FFC) from the Fertilizer sector. The banking sector is an indirect beneficiary. The rise in inflation causes interest rates to rise, improving the spreads of the sector. The banking sector spreads in May 05 stand at 4.8%. National Bank of Pakistan (NBP), Askari Commercial Bank (ACBL), Muslim Commercial Bank (MCB) and Bank of Punjab (BoP) have been included in our portfolio.

MARKET THIS WEEK

PENDULUM SWINGS TO AND FRO

With hardly any concrete news on the COT/Badla front, it was gratifying to see the market come off from the poor performance last week. After the index shedding 2.37% last week, the prices of various scrips appeared relatively attractive which created some interest for the genuine investors. This resulted in an upward movement of the index, showing a recovery of 3.34% WoW.

On Monday, the market kicked off with a lot of uncertainty on the COT issue as reflected with the KSE touching a 3 year all time low of 41 mn shares. As mentioned in our last weekly, the continuous fall of the market could generate good activity in attractive value scrips due to bottoming effect, good enough for the sleeping bulls to wake up and shake their tails, as was witnessed on Tuesday when the market took a U turn and rose 129 points with a volume of 134 mn shares. There was heavy buying in PTC, OGDC and POL. The banking sector performed well with MCB leading the way and closed on an upper circuit due to an expectation of good result announcement next week. PPL was quick to join the bandwagon and closed on its upper cap the same day.

With some good corporate results already announced and some others round the corner, the valuations seemed quite attractive and the same support was witnessed on Wednesday when the market crossed the 7450 level. It finished the day with an increase of 117 points. But as they say that every cloud has a silver lining, similar was the situation at KSE on Thursday, which fell twice from the high of 7488 and closed at 7405 index level. Shell saw an unexpected 1.2 mn share volume due to a better than expected result announcement.

 

 

On Friday, market opened on a negative note and saw a topsy-turvy movement with fluctuations resulting from rumors on the restoration of COT and sentiments generated from the taskforce report on the March crisis. But buying on dips due to attractive valuations averted the market from a major fall.

One of the major highlights during the week was the T-bill auction, which saw the SBP mopping out PKR 58 bn against a maturity of PKR 84 bn. The rates on the 6 and 12-m T-bills increased by 10 bps each, while the 3m increased by 15 bps.

Another key development was the submission of taskforce report on March crisis, which was one of the factors for the index dipping 37 points on Thursday and further led to a sluggish performance on Friday.

Moreover, PPL's joint venture exploration project of Pasni X-2 had incurred a cost of USD 31 mn, all going down the drain as it turned out to be nothing more than a dry hole. The company continues to incur rental charges of USD 52,000 per day on the oilrigs in place there.

Market outlook: We feel the market is likely to move up in the coming week, and breach the 7500-index level. Our top picks for the coming week remain PTC, NBP, DGKC & POL.

PAKISTAN ECONOMICS SNAPSHOT

WEEKLY

W-3

W-2

W-1

W

.

Forex Reserves (USD mn)

12,419

12,447

12,406

12,627

Exch Rate:

Exch Rate: PkR/USD

59.70

59.78

59.760

60.760

PkR/Euro

72.98

72.47

73.39

72.34

MONTHLY

MAR-05

APR-05

MAY-05

JUN-05

INTEREST RATES

3m T-bill

6.30%

7.2%

7.60%

7.69%

6m T-bill

7.10%

7.8%

7.95%

7.94%

12m T-bill

7.10%

8.3%

8.45%

8.69%

INFLATION

CPI (YoY)

10.2%

11.1%

9.8%

8.74%

MONEY

Currency in Circulation (YoY)

15.1%

15.1%

Na

Na

Deposits (PkR bn)

2209

2290

2320

2355

(YoY)

20.1%

20.49%

19.4%

18.2%

Loans (PkR bn)

1657

1720

1752

1759

(YoY)

39.4%

37.5%

36.7%

32.8%

M2 (YoY)

19.3%

14.1%

Na

Na

EXTERNAL BALANCE

Exports (USD mn)

1356

1301

1384

1541

(YoY)

3.8%

Na

Na

23.4%

Imports (USD mn)

2143

1903

2033

2241

YoY

10.5%

Na

Na

20%

Trade Balance (USD mn)

-786.2

-601.5

-648.7

-699.5

YEARLY

2001

2002

2003

2004

2005

GDP (USD bn)

58.51

63.50

67.70

69.07

75.29

GDP growth

1.84%

3.10%

5.11%

6.40%

8.4%

Agricultural Growth

-2.2%

0.1%

4.1%

2.6%

7.6%

Services Growth

4.76%

5.30%

5.24%

5.49%

7.9%

Manufacturing Growth

9.3%

4.5%

6.9%

13.4%

12.5%

Population (mn)

143

146

148

149

152.5

GDP per capita (USD)

408.6

433.9

457.4

463.6

503

TRADE BALANCE

Imports (USD bn)

10.202

9.434

11.333

15.47

20.6

YoY

6.2%

-7.5%

20.1%

36.5%

32%

Exports (USD bn)

8.933

9.14

10.889

12.27

14.4

YoY

9.1%

2.3%

19.1%

12.7%

17.1%

Trade Balance (USD bn)

-1.269

-0.294

-0.444

-3.2

-6.2

Current Account (USD bn)

-0.513

1.33

3.16

1.73

-1.9

Remittances (USD mn)

1087

2389

4236.85

3800

4168