BUDGET FY10 AND STOCK MARKET

MULAZIM ALI KHOKHAR
June 22 - 28, 2009

Our local investors prefer to invest on sentiments in the market rather than sticking to fundamentals. Nevertheless, when fundamentals are obvious and proven over time in the minds of relatively ignorant investors, they override the existing sentiments.

That is what happening nowadays. When we are saying good-bye to FY09 and laying down red carpet for FY10 a lot of information is daily flowing in from different sources and hence affecting the minds and actions of local bourses. They daily react to the upcoming or existing information as and when it happens.

This is obvious from the fact that, it was all-booming from Jan-09 to Apr-09 but as the budget neared its pace slowed down. The KSE-100 index was wandering around 7,000 level in the last couple of months, because of the wait and sees policy for the budget 2010. It was played by the rumors about taxes policies for the stock bourses and for the different sectors of the economy. The market activity was dull during the said period and the investors with long-term visions stood off the market.

Now when the budget has finally been announced with overall mixed policy measures for different sectors the market is responding accordingly. The budget has directly affected the stocks as it barred capital gain tax (CGT) on stock investments and replaced it with 16% tax on brokerage services. The budget has taxed some and relieved some other sectors of their additional fiscal tax burdens.

Overall, the budget is expansionary. When budgetary accretion will turn on the sectors like auto, cement, and textile, the pace will definitely be reflected in the stocks investments.

HOW WILL THIS HAPPEN?

The government has unveiled the annual development plan 2010 in which economy is predicted to be back on track towards the growth and development with 3.3% YoY growth rate. In addition to this, agriculture, services, and manufacturing sectors are predicted to grow at 3.8%, 3.9%, and 1.8% YoY respectively.

To achieve this, huge development expenditures have been announced on the back of expected heavy foreign aid inflows. The government has announced increase in Public Service Development Expenditure (PSDP) to Rs. 646 billions, allocations of which will be like:

52% for infrastructure development
39% for social services
Rs. 47 billion for dams,
Rs. 60 billion for water sector
Rs. 82 billion for transport and communication

Huge infrastructure development and social services expenditures will bridge the social poverty gaps and enhance GDP.

Further to assist the development, the sectors like cement, power, downstream oil and gas and auto are given incentives and tax benefits. Analysts from different corners have increased their fair values of the stocks in these sectors, which will positively affect the market.

POWER SECTOR

The minister of state for finance announced the measures to resolve the long standing circular debt issue of the power sector. TFC facility of Rs. 92 billion has been arranged with banks for PEPCO to discharge its debts with IPPs and Oil and Gas companies.

Subsidy for the sector has been reduced to Rs. 12 billion and Rs. 155 billion from PSDP have been allocated for the sector development, which is the actual backbone of the economy. The power generation capacities will be increased to 24701 MW in FY10 to meet the increasing power demand in the developing economy.

Analysts are positive to neutral about the sector's performance in the FY10. As the sector is witnessing major infrastructure development, its performance on the long run will increase but short-term outlook is still negative due to unresolved power generation and circular debt issues.

CEMENT SECTOR

The cement sector has one of the most lucrative investment opportunities in the stock market as the budget has allocated a record PSDP for dams. Furthermore, the FED on cement sales has been reduced by Rs. 200 per ton (i.e. Rs. 10 per bag).

These measures will increase local cement demand and will increase margins for the cement producers.

FERTILIZER SECTOR

Rs. 10 billion subsidy for urea import, sufficient agri-loans, and Rs. 2 billion Benazir Tractor Support Program will positively reflect the sector growth and hence their earnings will multiply.

Analysts look quite confident about the sector performance on the back of government's pro agriculture mindset.

Telecom Sector

The budget has reduced:

SIM activation charges from Rs. 500 to 250
Excise duty from 21% to 19%
Customs duty on handsets from Rs. 500 to Rs. 250
It has abolished Rs. 250 regulatory duty on hand sets imported in Pakistan while fixed charges of Rs. 0.2 per SMS have been imposed to tackle the SMS addiction of the youth.

These measures are overall positive for the fastest growing sector of the economy. Analysts are positive to neutral about investing in the stocks.

BANKING SECTOR

The stock market giant, banking sector, is struggling with its risk exposures. The policies of deduction on NPL have been resorted with restriction up to one percent of classified advances. Excise duty on banking services has been increased from 10% to 16%. All this will reduce investor focus on banks and hence most of the analysts are neutral to negative for banking sector investments.

TEXTILE SECTOR

The sector is still struggling to come out of the two-year old coma, but the conditions do not seem to be normalizing in the powerless environment in Pakistan.

The government has established an export investment support program of Rs. 40 billion and abolished the FED on imports and supply of VSF to strengthen the textile industry. It has increased withholding tax on raw materials import from 2% to 4%.

Looking at the existing power and country's ethnic and political environment the sector will remain under pressure until the solid growth factors are established in the industry. The outlook for the sector is neutral to negative by most of the analysts.

MARKET OUTLOOK

The budgetary measures will have overall mixed impact on the market and there are quite limited options left for the bourses. Textile, chemicals, banking, and other financial sectors are not given much weight in the budget while fertilizers, cement, power are given emphasis.

The recent T-Bill auctions on 17th July 2009 have witnessed a significant decline in the interest rates, indicating a solid decrease of 100 to 200 bps in the discount rates. The yields on 6 months and 12 months tenor bills have declined by a sharp 71 bps and 100 bps respectively in the current auction by State bank of Pakistan. The 6M-KIBOR has also declined by 82 bps to 12.98% on 17th July 2009 from its previous peak of 13.8% on May 21st 2009.

The decrease in interest rates is always a profitable for the bourses and the companies alike. On the day of the auction, the KSE 100 index witnessed a more than 200 points increase and the market broke through the psychological level of 7000.

Keeping in mind the expansionary budget of FY10, new tax policies and the decreasing interest rates, we can safely say that the market will pick up its pace in the coming few months and at the announcement of monetary policy it will be bullish.

Analysts predict the market will reach 10,000 levels in the current year.