CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

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4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. PAKISTAN WEEKLY REVIEW

 

PAKISTAN WEEKLY REVIEW

 

AlFalah Securities (Pvt) Ltd.
Monday, Aug 08, 2005-Friday, Aug 12, 2005

 

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

ABAMCO Capital Fund

13-08-2005

Sat

Annual Accounts for the year ended June 30, 2005.

ABAMCO Growth Fund

13-08-2005

Sat

Annual Accounts for the year ended June 30, 2005.

ABAMCO Stock Market Fund

13-08-2005

Sat

Annual Accounts for the year ended June 30, 2005.

ABAMCO Composite Fund

13-08-2005

Sat

Annual Accounts for the year ended June 30, 2005.

EFU Life Assurance Ltd.

13-08-2005

Sat

Annual Accounts for the year ended June 30, 2005.

EFU General Insurance Ltd.

13-08-2005

Sat

Annual Accounts for the year ended June 30, 2005.

PICIC Commercial Bank

13-08-2005

Sat

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

P.I.C.I.C.

15-08-2005

Mon

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

Lakson Tobacco Co. Ltd.

15-08-2005

Mon

Annual Accounts for the year ended June 30, 2005.

Soneri Bank Limited

16-08-2005

Tue

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

NDLC-IFIC Bank Ltd.

17-08-2005

Wed

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

Colgate-Palmolive (Pakistan) Ltd.

19-08-2005

Fri

Annual Accounts for the year ended June 30, 2005.

Hinopak Motors Ltd.

22-08-2005

Mon

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

Bata Pakistan

24-08-2005

Wed

Half Yearly Accounts for the year 2005.

ICI Pakistan Ltd.

24-08-2005

Wed

Half Yearly Accounts for the year 2005.

Union Bank Limited

24-08-2005

Wed

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

Pakistan Petroleum Ltd.

27-08-2005

Sat

Financial Results for the year ended June 30, 2005

MARKET FOCUS

THE OIL SLICK

OIL: WHERE WILL THE BUCK STOP?

The oil prices have been busy setting new records in the past six months, on fears of instability in the Middle East and refining bottlenecks in the United States. The economic powerhouses in the shape of the OECD countries have been able to withstand the onslaught without much ado, but the minnows of the world economy in the shape of Pakistan can have ramifications that can throw a spanner in the future plans of GOP's pro-growth mantra.

 

 

THE GREAT LEAP...

The oil prices have been busy matching the speedometer of a Ferrari during its initial acceleration. Over the past 18 months the world has witnessed oil prices clear $40, then $50, and just yesterday rummage through the $65 per barrel figure.

Economists around the world have already started to send their feelers about a global meltdown, with cracks already appearing in face of future inflation expectations and an eventual slowdown due to a decreased spending capacity of the consumers.

Surprisingly, the effect of sky-high oil prices on the global economy has been subdued. According to a study by The Economist, the dichotomy is brought about due to the nominal oil prices and their historic trend.

While the nominal prices are at record levels, in real (inflation-adjusted) terms they are still below the levels reached during the Iran hostage crisis. The cost of a barrel of oil reached $90 in today's dollar terms. Given this scenario the consumers of today are better off in disposable income terms.

In 1980, the median personal income in the U.S was $16,300 (in 2003 prices), versus $22,700 in 2003. Furthermore, the economies around the world have become more fuel efficient with their usage of oil. Both these factors combined have made possible for a soft landing and have kept the global economy from reaching the demand destruction level.

THE DEMAND AND SUPPLY MECHANISM OF OIL...

DEMAND SIDE:

In an environment where global spare capacity of pumping oil is close to 5% (in 2004 it reached a record low of 4%), along with an insatiable growth in demand, the pricing mechanism of oil is driven by the marginal demand rather than the supply.

This is primarily because the time frame for adding new production capacity (2-4 years) is too long to have any impact on the immediate supply. When spare capacity is low one should expect the prices to be high.

The main features of demand driven pricing pressures are high and volatile prices (witnessed in the past six months with ample evidence). The higher prices are a combination of the market seeking the price at which demand growth will moderate rather than the price at which new supply can be encouraged.

Global oil demand growth according to the Energy Institute Agency figures for 2005 should be around 2.3% or 1.9MMBD, a slowdown from the frantic 2004 demand growth (3.5% increase, 2.78 MMBD). The main contributors for future demand growth are the usual suspects in the shape of the U.S (showing a robust growth pattern in the last nine quarters) and China.

SUPPLY SIDE:

The global supply of oil is based upon OPEC and Non-OPEC production. The current Non-OPEC production is approximately 50MMBD but is plagued with an annual decline rate of 3-5% or 1.5-2.0 MMBD. The main contributor from the Non-OPEC side is Russia which has provided 70-80% of all Non-OPEC production growth in the last five years. But the country has been beleaguered with politics (the YUKOS affair) and high tax rates leading to minimal investment in the upstream sector.

OPEC has announced plans of increasing its capacity by an extra 1.6MMBD, but a lot of market experts are skeptic about the gesture. A major hurdle has been the apparent unwillingness of Saudi Arabia to increase production much past 9.5MMBD. The incremental production is thought to be of sour and heavy crudes which the Saudis believe that the global refining system will not be able to take until more upgrading/conversion investments have been made.

How does Pakistan figure in all this? Read below

QUITE AN OILY SITUATION!

With international oil prices for WTI touching USD 66/Barrel, Saudi light and Abu Dhabi Murban crude at record highs (as of August 5th 2005) of USD55/Barrel and USD59/Barrel respectively, and local prices stable for the past 5 weeks, expectations of an upward revision in local petroleum prices seems quite evident. Though an increase in prices may be on the cards what we have to look at is the impact this is likely to have on Pakistan, which includes the government as well as the different industrial sectors.

Amongst the petroleum products available in Pakistan HSD and FO are consumed the most (see fig.1). In addition to this the main sector wise consumers of petroleum products are the transport and power sectors whose consumption is heavily inclined towards HSD and FO with HSD making up 80% of total transport sector petroleum consumption and FO making up 98% of total petroleum consumption in the power sector.

THE HSD FACTOR

The prices of HSD in Pakistan are based on the 15 day average of Gas-oil prices of the Arab Gulf mean. Though prices and imports of HSD are deregulated and left to the OMC's, at the moment the government is providing a subsidy of PkR 5 to keep the prices lower for the local consumers. The impact of growing oil prices would thus have a direct impact firstly on the government. The price differential claim (PDC) which the government has applied would grow if it decided to keep local prices stable and the increase of the PDC would increase the amount of liabilities the government has with the OMC's. With present PDL levels at zero, the government is likely to require additional funding for these additional claims from the OMC's. This could make the government borrow more than budgeted and thus possibly even crowd out private investment thus adversely affecting the economy.

With present claims at PkR 7.3 billion we can see that without any changes in local prices for HSD, the claims are projected to increase to PkR 20 billion plus. Our analysis however has not taken into account PDC for LDO and Kerosene as their volumes are not substantial. What seems as a more likely scenario for the FY06 is the last scenario where local and international oil prices rise by 15% from 1st July 2005 levels. This would increase the PDC by PkR 6.1 billion to a total PkR 13.4 billion. If we take kerosene and LDO into account then PDC could well be at PkR 14 billion levels. There are two possible impacts of this situation. If PDL level remains at zero, then the PDC will either be taken out of the development expenditure budget or it will be borrowed in which case private investment may well be crowded out.

If however the government decides that the prices should increase, then a reduction of the PDC would be in order, which would lower their liabilities. The impact of this can be seen in the table provided. Therefore the prices of HSD can be seen as a function of how much hit the government can and is willing to take. With the next announcement of petroleum prices scheduled for the 16th of August 2005, we see that an upward revision of prices two days after Independence Day would not be done for political reasons. However, expectations of revisions from the 1st of September are very likely. Presently, with the downward revision of the PDL to PKR 15.93 it does seem as though the government is planning on keeping consumer prices of HSD relatively stable. However the PDC component in the pricing mechanism is equally as important and may require additional funding if PDL on products is kept at present levels of zero.

DEEP IMPACT

The impact on transport sector, which is an integral part of each sector, would be adverse. The overall effect would be an increase in cost for all sectors with a greater impact on those using extensive transportation based on high speed diesel. This can also be seen to be causing an overall increase in prices of consumer products and thus an increase in inflation rates.

POWER SURGE!

The prices of FO which are based on the 15 day average of HSFO prices are completely deregulated with no restrictions on imports or prices. Thus the retail prices of FO are a direct function of HSFO prices worldwide which are a direct function of international crude oil prices. The FO prices are expected to increase locally which would adversely affect the profits of Independent power providers (IPP's) which would in-turn have an affect on the power prices within the country. This too would lead to increasing costs throughout the economy as well as inflation.

THE OMC CONNECTION

Despite having to keep prices of HSD low the OMC's are benefiting from this arrangement through the PDC factor. With increasing world prices the major beneficiaries are the OMC's of which PSO will stand to gain a lot as it has a big market share in HSD (61%). Also as major competitors such as shell are looking more towards profits rather than volumes, they are most likely to focus on lubricants rather than HSD. On the furnace oil front, PSO is also likely to benefit tremendously. PSO has long term contracts for the supply of FO with many major IPP's which include HUBCO and KAPCO. Thus they are not likely to lose market share in FO (73%) and with increasing oil prices, revenues from this product are expected to rise from PkR 64 billion in 2005 to approximately PkR 69 billion in 2006.

WAY UP!

Rising oil prices are expected to increase the oil import bill quite drastically. If we analyze figures of 2002 and 2003 we can see that even though imported volumes decreased from 16 million tones in 2002 to 13.1 million tones, the import bill was constant at USD 3.1 billion depicting the price effect. For 2004 there was not only a 7% growth in POL product imports but also a huge price effect which say the import bill at levels close to USD 5 billion. With an expected increase in HSD consumption and a increased FO consumption by the IPP's due to the lack of a proper gas distribution system within the country, levels of USD 6 billion-USD6.5 billion for the oil import bill can be seen on the cards.

ECON FOCUS

Foreign reserves, declining but still comfortable:

It has been only six years, when the foreign exchange reserves of Pakistan had dwindled down to a few millions, taking the country to the brink of a default on its sovereign liabilities. Since then a lot has changed, and the default risk, which seemed so imminent, has now substantially reduced. However, the astute investor should never lose the sight of economic indicators like foreign reserves, import cover and foreign liabilities in making his investment decisions. Indeed, during the last few months, the macroeconomic themes have been revolving around the indicators of inflation and interest rates, however, prudence and wisdom would require a more comprehensive coverage of the economic landscape. According to the recent data released by the State Bank of Pakistan, the foreign exchange reserves stand at USD12.5bn (down by USD94mn in the week). The import cover stands at 7.5 months. We believe that the reserve position is comfortable enough to keep the exchange rate stable (2.5%-3% depreciation expected in FY06). The key risks are 1) rising import bill and 2) debt payments.

The 9/11 and the decision of Pakistan to join the alliance against terrorism, proved to be an economic catalyst. The foreign exchange reserves, which had reduced to a few millions, started to pile up as the country received windfall gains from the crackdown on 'hundi' system. Since then, the reserves have been further compounded by privatization proceeds and favourable macroeconomic conditions (read: balance of payment surplus, courtesy of trade and current account surpluses). The domestic foreign exchange reserves touched a peak of above USD13bn a few weeks ago, however, higher import bill, mainly due to high oil prices have been a constant eroding factor. High oil prices are having a two way impact on domestic forex condition. One the one hand, the reserves are being eroded by higher oil payments, however, on the other hand, the oil boom, and resultant petrodollars in the Middle East are also improving the home bound remittances and foreign investments. We expect the reserves to increase to over USD13.5bn by Dec-05. The main factors behind the accumulation of reserves would be 1) privatization proceeds 2) remittances and 3) foreign aid, especially the Japanese Yen Loans.

The comfortable position would ensure that the PkR remains in a stable range against the USD. We expect around 2.5%-3% depreciation in the PkR, mainly due to 1) higher inflation 2) rising trade deficit. The exchange rate remains conducive for the textile sector and we are optimistic about the sector. We are increasing our coverage to key players in the textile sector like Nishat Mills and Azgard Nine.

The foreign exchange reserves would get further bolster by privatization proceeds. Currently the government plans to use the proceeds for debt repayments, if some of the proceeds are withheld for domestic operations, it can further increase the domestic forex profile.

MARKET THIS WEEK

OMINOUS CLOUDS

Some of you may be wondering at this point how an "unexpected" downturn in the stock market can be predicted. The answer is, it can't -- although hardly a day goes by when we don't hear from some market-savvy friend eager to give this manifestly futile task a try. This week saw the market erode 3.6% WoW with most of the major scrips hitting the deck. The index fell further under the pressure of heavy selling, like a rock tumbling down the cliff.

The selling pressures from leading brokerage houses and lack of institutional activity on expectations of penalties to be imposed on brokers highlighted in the task force report created a mini crisis in the market as the index dipped 6% (about 450 points) from Monday to Thursday.

Monday saw the market open on a positive note making the week high of 7482. But from there on, bears dominated the day with the market suffering on the back of PTCL Management takeover news. The rumor that Etisalat might be unable to arrange funding for PTCL payment disturbed the market as it closed 103 points down, with a turnover of USD 267mn. PTCL was the surprise in the kitty that single-handedly pushed the index down by 40% (40.24 points). The bearish spell continued on Tuesday on the account of rumors that 'Task Force' would soon be imposing penalties on brokers. OGDC was the main index-dipper causing the index to shed 48 points with a turnover of USD 207.3mn.

The bears continued to dominate the market on Wednesday with the index caving in 1.6% (down 119 points) to close at 7065. Oil stocks continued their downward slide despite record high oil prices. Most of the leading stocks closed in the negative zone apart PTC which closed up 0.4% (PKR 0.25). The market continued the downward trend on Thursday as the index dipped 1.34% (93.59 points) to close at 6970 level. Most value scrips declined notably PTC (down 1.15%), POL (down 1.35%), OGDC (down 0.95%) and PPL (down 2.8%).

As expected, the market showed some positive correction on Friday as it recovered 2.58% (180.06 points) closing at 7150.65 level. Although the market opened positively, it soon dipped to 1.62% (down 113 points). By the end of first half, the market did recover slightly but still could not cross the 7000 barrier. However, the sleeping bulls finally woke up in the second half and showed a tremendous upside of 2.22% (155 points) due to rumors regarding resignation of the current SECP chairman. High oil prices and low value scrips finally behaved as expected as PPL closed on its upper lock while OGDC and POL moved up 4.45% and 2.6% respectively. Volumes were 83% better than Thursday as the low prices offered attractive buying avenues.

Market outlook: We believe Bullish resolution is possible -- one that merits more than a passing mention, since we cannot afford to wed ourselves to a scenario that admittedly is highly speculative at this point. To be specific, the KSE-100 can bounce back to the same levels of 7450 if the continuing tussle between the 'Task Force' and the brokers is settled peacefully. Over the next two to three weeks, probably, we will be patiently observing price action in the KSE-100. Our outlook for the near-term remains bullish, but we shouldn't presume one way or the other, for we cannot assert right now with any great confidence when the COT/Badla issue will be resolved and the on going crackdown on the brokers by the task force will be settled so a bullish outcome is any more likely than a bearish one.

We recommend clients to adopt a 20% gradual accumulation strategy. Our recommendations are NBP, OGDC, POL and PTC.

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