Fear of tax on share business was on cards, which resulted in heavy declines at the share market. The government officials repeatedly through communiqué told investors that it won't impose new tax, but investors were convinced that rate of existing levy would be raised. Dream become a reality and the government on June 5, announcing federal budget for 200607 doubled CVT rate to 0.02 percent from 0.01 percent on purchase of listed shares.

June 12 - 18, 2006

Another slight negative is the increase in the rate of withholding tax on stock market transactions from 0.005% to 0.01%. The impact is expected to be slightly negative in the short run, especially in terms of volumes being reduced as investors digest this increase. The increase in CVT rate has the potential to raise a further Rs 1.25 billion-1.50 billion from the KSE only if traded value remains the same as FY06.

However, if average traded value remains as low as it has in the last quarter of FY06 to-date, then overall CVT collection from the stock market may amount to only Rs 1.75 billion-2.00 billion from KSE. We feel the government target for CVT, of Rs 2.9 billion in FY07 Budget documents is quite conservative, as CVT has now also been levied on real estate.

Mutual funds' investment in COT (now CFS) was previously exempted from taxation. It has now been brought into the tax net. This could compel some funds to pull out liquidity from the CFS market. However, since CFS returns are still high, the fund pullout may not be too much. This step may have been taken to reduce dependence on mutual funds for financing, as the government has time and again stated that it is not the job of mutual funds to provide leverage to investors.

Tax rate on brokerage and commission has been set at 10%, thus representing no change from the previous level. Thus, the impact of this announcement is neutral.

The Budget documents mention a reduction in tax rate on inter-corporate dividends from 10% to 5%. Tax on inter-corporate dividends is already 5%; thus we believe this measure may not have any impact. We believe this could be an incentive for private companies, which might be paying higher taxes on their dividend income.

No reduction made in corporate tax rate of listed companies. Therefore, now all listed companies (including banks) will have to pay corporate tax at the same rate of 35%. Tax rate for unlisted companies has also been reduced from 37% to 35% as per changes made in the Finance Act, 2002.

In a move to encourage participation in IPOs, the government has allowed the maximum limit to avail tax credit through investment in IPOs, to be raised to Rs0.2mn from Rs0.15mn. This is a slight

positive for the stock market, as it will encourage participation in IPOs, which have really become scarce at the local bourse for quite some time now.

Khalid Iqbal Siddiqui, head of research at Investcapital Securities said that the local stock market has gone through a very volatile 2006 to-date. However, investors' returns from local equities in 2006 to-date are still positive at 8.6 percent. Time and again, we have reminded investors that looking at the overall KSE-100 level for any signals, sometimes causes investors to overlook potential buying opportunities in selected stocks and sectors. The KSE-100 is currently trading at FY06E and FY07F PE multiples of 10.5x and 9.5x, respectively, and offering FY06E and FY07F dividend yields of 5.3 percent and 6.0 percent, respectively.

"We advise investors to take advantage of attractive valuations at these levels in OGDC, PTCL, DG Khan Cement, Packages Ltd., Hubco, Nishat Mills, Bank of Punjab, Nishat Chunian, Maple Leaf Cement, Pioneer Cement, FFBL and Lucky Cement.

The banks, insurance companies, cement makers and fertilizer manufacturers may gain from the budget announced on June 5 as tax cuts, higher allocations for infrastructure and incentives for agriculture raise profits. A record amount has been allocated for development infrastructure, which would go a long way in providing much-needed support to the rising economy.

The country 1.3 trillion rupee ($22 billion) budget for the fiscal year starting July 1 aims to boost tax revenue in a country where less than 1 percent of the population of 160 million people pays income tax. The government expects total tax revenue will rise 18.6 percent to 835 billion rupees next year.

Prime Minister Shaukat Aziz wants to raise tax collections to pay for new roads, port modernization and power projects, which will help maintain economic growth at 6 percent to 8 percent over the next five years. Three percentage points in the budget cut the corporate tax rate on banks to 35 percent. This was the fourth consecutive year of tax cuts for banks aimed at bringing lenders at par with other companies.

Bank profits will grow 5 percent as a result of the tax cut, Jahangir Siddiqui Capital Market's report said, while measures to promote agriculture and small and medium enterprises will also raise credit demand from these companies. The banking sector has ``strong earnings momentum and robust fundamentals,'' said an analyst.

Mohammad Imran, research analyst at Jahangir Siddiqui said we are maintaining an "overweight'' stance on banks, forecasts profit will grow 44 percent in 2006 and 20 percent annually for the next four years. The company recommends a buy on Bank of Punjab, Askari Bank, Faysal Bank, National Bank of Pakistan, Muslim Commercial Bank and United Bank.

The budget maintained a capital gains tax exemption on the sale of shares for insurance companies up to June 2007. "This bodes well for the industry,'' the report said. ``In the long run, companies need a strong equity base. Realization of capital gains will strengthen their equity base."

The budget also allocated 132.5 billion rupees for new infrastructure projects, 44 percent more than last year. These will include the lining of 87,000 canals and building five new dams and will boost the fire and property insurance business. Profits of the non-life insurance sector grew 95 percent in 2005 and Jahangir Siddiqui's report said revenues for the business would grow at an annual rate of 25 percent for the next five years.

While presenting the budget Omar Ayub Khan, state finance minister also said that government would also halve the duty rates on imported trucks and buses and the kits used to assemble those vehicles in the country, starting July 1. Import duties on so-called knocked-down kits, which are used to assemble trucks and buses locally, will be cut to 10 percent while duties on imported trucks and buses will fall to 30 percent.

These incentives would also aid the insurance sector as the auto business contributes more than half the net premiums to the insurance sector and analysts forecast auto sales to rise at an annual pace of 17 percent for the next five years. The company has a ``buy'' recommendation on Adamjee Insurance and Pakistan Reinsurance.

Higher allocations for infrastructure development will benefit cement companies, keeping demand growth strong. Incentives for the construction industry including the removal of sales tax on machinery will also increase cement sales and expected to record an increase of 12 percent to 20.8 million tons next year.

The construction industry grew 9.2 percent in the year ended March 31, 2006, faster than the government's target of 7.5 percent. Jahangir Siddiqui Capital Markets has recommendations on D.G. Khan Cement and Lucky Cement.

Agriculture, which makes up a quarter of GDP, was given several incentives, including the removal of customs duty on machinery and tractors and the setting up of a new research institute to study yield enhancing methods. The subsidy on fertilizers was also increased to 12.3 billion rupees from 5 billion rupees.

"Decent farm growth coupled with sufficient agri loans will sustain high fertilizer demand and benefit local manufacturers,'' the report said. Fertilizer sector profits grew 30 percent in 2005. Agriculture grew 2.5 percent in the 2005-06 crop year, missing the target of 4.2 percent. The government forecasts growth of 4.5 percent in the fiscal year that begins July 1.