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, Aug 22, 2005-Friday, Aug 26, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

National Refinery Ltd.

05-09-05

Mon

Annual Accounts for the year ended June 30, 2005.

Kot Addu Power Company

06-09-05

Tue

Annual Accounts for the year ended June 30, 2005.

Shell Gas (LPG) Ltd.

08-09-05

Thu

Annual Accounts for the year ended June 30, 2005.

General Tyre & Rubber Company

31-08-05

Wed

Annual Accounts for the year ended June 30, 2005.

Saudi Pak Commercial Bank Limited

30-08-05

Tue

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

Dewan Salman Fibre Limited

30-08-05

Tue

The amendments in the object clause of the Memorandum of Association of the Company.

Attock Refinery Limited

02-09-05

Fri

Annual Accounts for the year ended June 30, 2005.

Standard Charted Modaraba

05-09-05

Mon

Accounts for the year ended June 30, 2005.

Fauji Cement Co. Ltd.

07-08-05

Wed

Annual Accounts for the year ended June 30, 2005.

Kohinoor Energy Limited

07-08-05

Wed

Annual Accounts for the year ended June 30, 2005.

 


 

WEEKLY COMPARISON

 

CURRENT

PREVIOUS

 
 

26-Aug-05

19-Aug-05

Change %

KSE-100

Index

7790

7586

2.7%

Volume (mn sh)

248

279

-11.1%

Investment (PkR mn)

30,792

25,922

18.8%

MAJOR STOCKS

BOP

98.50

91.85

7.2%

DGKC

61.75

59.40

4.0%

FFBL

34.50

34.15

1.0%

MCB

108.65

99.00

9.7%

NBP

118.50

107.70

10.0%

OGDC

114.56

111.35

2.9%

POL

364.35

337.80

7.9%

PPL

182.70

170.05

7.4%

PSO

386.50

379.50

1.8%

PTCL

64.25

65.55

-2.0%

Source: KSE Website, Alfalah Securities Research

For the Pakistani investor, apart from keeping gold in his portfolio as we suggested last week, we propose that investors should also explore towards stocks which have lower free float market capitalizations rather than only investing in companies which have high free float market capitalizations.

THE PORTFOLIO:

When making any sort of investment, there is usually a trade off between returns and risk. The main goal of an investor is to hold a portfolio which provides the minimum amount of risk and gives the maximum amount of return. Diversity of equity investments within a portfolio is a method used by many investors in achieving this goal. Investors should diversify their portfolios not only in regard with the number of stocks held within a portfolio, but also should look towards diversifying on the grounds of free float market capitalization. Intuitively, this would be a correct hypothesis because at times when the market is bullish, the shares with high free float are the ones which rise heavily due to their high correlation with the market and thus get overvalued rather easily. As a result, at times when the market dips, these stocks are also the major losers.

THE PLAYERS:

The analyses we have conducted has compared the top 28 companies in terms of free float market capitalization, breaking it down to top 14 and lower 14 companies (table 1, not in rank). However we have not taken into account a few top companies such as PPL due to the unavailability of substantial historical data owing to recent listing of the company. Also, companies like Unilever, Nestle and Packages have not been taken into consideration due to extreme unavailability of traded shares that would mitigate the implementation of strategic investment decisions.

TOP 14

LOWER 14

National Bank

PICIC bank

O.G.D.C

Nishat Mills

P.S.O

Bank Al-Habib Limited

P.T.C.L

S.S.G.C

Hub Power Company

Shell Pakistan

F.F.C

Askari Comm. Bank

National Refinery

Faysal Bank Limited

Pakistan Oilfields

Nishat Chunian

Engro.ltd.

Adamjee Insurance

M.C.B

I.C.I

Fauji Fert. Bin Qasim

Union Bank Limited

SNGPL

Cherat Cement

Bank of Punjab

Pak PTA

Lucky Cement

Ibrahim Fibers

Our basic observation and hypothesis is that at times when the market has fallen, the lower free float market capitalization stocks have given a lesser negative return than those with a higher free float market capitalization. For the period 4th April 2005 to 30th April 2005 we can see during this time the market fell by nearly 12% and that the top 14 companies gave a negative return of nearly 150% where as the lower 14 gave a negative return of 70%.(Fig.1). At this period in time we can see that an investment in low free float market capitalization stocks would in a sense pose as a hedge for the investor. The March crash has not been taken into account as that was an exceptional case as well as a product of the futures market rather than the ready market on which we have based our analysis.

In addition to this we see that during the time period 12th May 2005 to 29th May 2005, the KSE index saw another major decline of 15%, during which the negative return on the top 14 companies was nearly 215% where as the negative return on the lower 14 was near 170 % which is yet more evidence on the fact that at dips, lower free float market capitalization companies do relatively better (Fig.2).

In addition to this, if we take a trip back in time to the period 30th August 2004 to 22nd September 2004, we can see that the market in this time frame gave a return of negative 10%. The top 14 companies during this period gave a negative return of 153% where as the lower 14 companies gave a negative return of 120 %. To further the analyses we took into consideration 391 data points covering the time period between 1st February 2004 and August 31st 2005. Observations showed that when the market was in a dip, 70% of the times, the lower 14 showed a relatively better return than the top 14.

ECONOMY FOCUS

KATRINA RUMBLING  BUSH BUNGLING

Oil prices breached USD 70 per barrel as hurricane Katrina hit the Gulf of Mexico. The Gulf of Mexico accounts for 25% of US oil output. An estimated 95% of crude its oil production and over 88% of natural gas production has been halted due to the natural disaster as over twenty oil rigs are missing from the area. The supply shock could not have come at a worse time; the refineries of the world are already working at capacity to satisfy the insatiable thirst for oil.

OCAC'S HAND WAS FORCED:

The upsurge in oil prices left the government with few options. Saudi light prices have jumped from USD 46 per barrel in June to USD 59 at the end of August. After having suffered losses of PkR 8 billion in just the first two months of this fiscal year, the oil import bill is expected to breach the USD 6 billion mark. Some of the hike in oil prices had to be passed on to the consumers as well. The local body elections allayed the fear for a couple of weeks, but the inevitable had to happen. Motor Spirit prices were raised by 7.5% while High Speed Diesel went up by around 9%. For the economy as a whole, the HSD hike has far reaching implications as it accounts for 56% of all petroleum product demand.

TRADE DEFICIT SOARS:

The SBP is very clear in their strategy of maintaining the strength of the Pak rupee to prevent any cost push inflation pressures. Thus, the state bank has ruled out any substantial deprecation of the rupee. We expect the exchange rate to depreciate to a maximum of USD 59.90 but it is highly unlikely that the SBP shall allow the rupee to depreciate further then that. The implication; the trade balance deficit expectation has been revised from USD 6 billion to USD 10 billion. That represents a significant drain on our foreign exchange reserves.

AT THE CROSSROADS-WHAT IS SBP'S MAGIC NUMBER:

Real interest rates having approached neutrality, the State Bank is faced with a tough choice to make. Should it continue raising interest rates to curb inflation in the economy or should it let the interest remain stable. The answer depends on what the SPB considers the lesser of the two evils; lower then projected economic growth of 6% or higher then expected inflation of around 8.5-9%. Already this week, government officials have spoken of the possibility of raising the inflation target from 8% to 9%.

WE'RE ALMOST DONE:

The pro-growth argument assumes that interest rates are peaking out and expect a flat yield curve. They believe that the government has eliminated the adverse impact of demand-pull inflation by controlling excessive money supply. The reason that inflation figures have not come down as much as expected is because of exogenous oil shocks that have fuelled cost-push inflation. If the government tries to eliminate this kind of inflation as well, it shall be a serious drag on economic growth.

WE'VE ONLY JUST BEGUN:

The advocates of lower inflation expect continued hikes in the interest rates; in effect, they are expecting an upward sloping yield curve. We too expect the interest rates to keep rising for some time, based on the lack of interest in 6-month and 12-month Treasury bills during the last auction held on 31st of August. For its part, the government is yet to take a definite stance on the issue. The weighted average yield on the 12-month T-bill is at 8.78%, while the discount rate is 9%. A difference of a more 22 basis points is much less then the historical difference of over a 100 basis points. Due to the convergence of the T-bill and discount rates, the present discount rate of 9% is no more acting as a deterrent to bank's credit off take. It is not serving its purpose of being a hurdle rate anymore.

DARK CLOUDS FOR THE EQUITY MARKET?

Expectations of a rise in the discount rate have been built in for some time, but for now the SBP is resisting. Only an upward revision in the discount rate would allow the T-bill yields to go up further. If that happens, the signs for the equity market are ominous, as fixed income securities shall be providing double-digit returns without the risk of stocks. But before jumping to any conclusions, it is important to wait on the government's decision on the discount rate. Only then can we determine the true shape of the yield curve.

MARKET THIS WEEK

The index went up by 2.7% WoW, to reach 7789.76 level, in line with our expectations suggested in the previous issue. Volumes were up by 27% to USD629mn . This week, a bull run was witnessed, mainly on the back of a) rising oil prices in the international market b) higher than expected corporate results c) increasing interest of foreign funds in local market as the badla issues resolved in the shape of CFS.

During the week, global oil prices hit a record high of USD 70.8 per barrel, mainly due to the threat posed by Katrina hurricane on the US refineries.

Bulls ruled the market on Monday as the index went up by 1.4% (106 points), with USD 598mn volumes. As highlighted earlier, the upside was mainly due to the surge in oil prices and good corporate result announcements. On Tuesday, the upward trend continued as the index went up by 0.7% (56 points), as the refining companies benefited from the increasing oil prices. T-bill auction on Wednesday did not create much opportunity for investors to enter the market as people were expecting major correction due to hike in interest rates by 10 to 15bps on all tenure of T-bills. The index was up by 0.7% (52.67pts), achieving the level of 7796 after a gap of nearly 5 months. Thursday showed a mixed trend and volumes were xxx% lower than the previous day. Profit taking was observed in major stocks and even a jump in local oil prices by 5% to 9% on average, did not support much to the OMC's as PSO went down by 1.3%.

Volumes were lower on Friday, being the last working day. Oil and gas and Banking remained the hot sectors with OGDC and POL together contributing 32% to the volumes. Pak Oilfield was up 5%, in line with good result expectations (BoD on Sep.11). MCB was up 1.8% with better than expected earning figures for the last two months. Overall refineries showed a correction, after doing well for the last three days. Power sector also showed good upside after HUBCO's announcement. HUBCO and KAPCO were up 2.2% and 5% respectively.

Major results of the week:

STOCKS

EPS

CASH DIVIDEND

BONUS

PPL

12.57

5.5

-

NBP

7.44

-

-

Lucky Cement

3.14

-

-

ATRL

34.94

-

30%

OUTLOOK:

Correction has been witnessed in major stocks and can continue. Index is getting support as other stocks (under-performers) have been moving up recently. Market is likely to behave the same way next week. Our recommendation is to buy on dips, however we feel that a sustainable/better upside would be witnessed once market has taken a good correction.