WHERE THE MARKET IS HEADING?
Investors have to be careful in picking the scrips
June 05 - 11, 2006
Since the start of 2006 the KSE-100 index has shown constant rise. The current bull-run has continued for almost six months now with only one sharp and short-lived correction in early March when the index plunged almost 14% in a week only to recover the very next week. The market appeared on the path to newer highs going forward, but the recent plunge shattered the confidence of the coolest punters. Some recovery was witnessed lately only because seasoned players started careful stock-picking. Investors investing in scrips trading at relatively low forward PER multiples, and also allocating a portion of funds to high dividend yielding stocks, seem less prone to market volatility.
The rally that started towards the end of 2005 was primarily driven by the phenomenal rise in banking sector profits. The sector clearly outperformed the market with prices of some of the shares hovering at record highs without showing any sign of correction. Five of the listed banks posted attractive results for the year ended 2005 and also showed enormous upside potential. However, it was evident sooner than later spreads of smaller banks would come under pressure as they would be forced to raise return on deposit for mobilizing additional resources. It was also said that if such a race starts it would also affect the margins of even the larger banks.
Around the same time cement stocks started attracting considerable interest of the investors and punters. Cement plants were running at high capacity utilization levels and the commodity was being sold at a premium to its ex-factory price. With the start of post winter season, the demand for cement picked up momentum and the commodity's price in the market touched record levels. Around that time some of the analysts raised caution to adopt a strategy of staying away from investing in companies not undergoing capacity expansion. They also warned about possible decline in earnings across the board going forward as supply improves. To bring down cement price low and facilitate construction in quake affected areas, the government allowed duty free import of cement and also offered freight subsidy in a bid to bring down cement prices. Import of cement was also allowed from India. Media also published reports about possible imposition of ban on cement export. This boded well for cement manufacturers but outlook of cement remained volatile and continued to adversely affect the construction industry.
The discoveries in Tal block injected life into the oil and gas exploration sector, which was lagging behind during January-March period. While the reserves numbers were being finalized speculators kept fueling the market. The stock prices of exploration companies responded massively to this news. Market awaited further news inflow and confirmation of the exact reserve size of the field before coming up with any investment strategy. Margins were cut for oil marketing companies, which reduced their attractiveness for investors after the announcement of this decision.
Gas distribution companies, Sui Twins continued trading at premium to their fair values. The primary reason for such high prices has been the privatization play and the interest shown by some globally reputable organizations in acquiring strategic stake in these companies. There was also unconfirmed news that before the privatization of these companies the government, with the consent of new owners, will draft a new return formula that will provide better returns than the existing asset based formula.
While bears and bulls continued to lock their horns, mind boggling rumors and news continued to pour in. These included imposition of tax on capital gains, enhancement in capital value tax and introduction of universal identification number for the investors. At one stage there was rumor about emerging default of a few members. While one may have all the objections on such rumors, selling of some scrips in big blocks kept the uncertainty level high. The market consolidated during this week but only after red hot rumors suggesting that couple of membership cards have exchanged hands.
The policy planners and regulators were also not very comfortable. First the Prime Minister had to say that neither any new tax would be imposed nor rate of the existing rates would be enhanced. Then Chairman SECP Razi-ur-Rehman Khan followed the suit and said that market had not crashed. Many punters accepted these statements on face value only because most of the volume leader scrips were available at very attractive prices. However, some of the analysts are of the view that there is no probability of imposition of new taxes. The regulators/policy planners are pleading the case of withdrawal of tax on dividend half heartedly. Most of the investors are of the view that day traders lobby is far stronger than the investors.
Some quarters have once again raised the issue that some of the institutional investors are indulging day trading. They say that one of the reasons to suspect indulgence in such activities is portfolio still do not classify their investment according to globally accepted standards.
They refer to recently issues circular by the central bank. They say it is nothing but a replica or reinforcement of the draft that was circulated during February this year. It has been stated by the central bank that commercial banks and other financial institutions have been using their Held-to-Maturity (HTM) securities to generate liquidity in the event of possible liquidity crunches. The circular goes on to castigate these institutions and term it imprudent liquidity management. The circular states that from 1st July 2006 this facility of REPO borrowing and discounting at the SBP window using HTM securities would not be available. However, the SBP has provided a small window of opportunity to these institutions to get their books in order through a one-time reclassification of securities among 'Held for Trading', 'Available for Sale' and Held-to-Maturity by 15th June 2006.