KSE in lieu of US rating downgrade


From the onset of current month, bears dictated the terms to local investors as index posted a hefty negative return of 7.62 per cent with average volume of 61.76 million shares. The global economic concerns were huge in contrast with domestic economic issues; hence the benchmark replicated the performance of the Dow-Jones. But on theoretical grounds, local bourse seems different in contrast with US market. On the flipside, domestic investors whether individuals or fund managers, both seem to be on the same wave length when it comes to reading the market sentiment.
It is believed that the current bear is a preemptive way of managing the possible foreign outflow from the country. Earlier in 2008, after global fund managers dumped their holding in local market, the local investors were unaware what was going to happen next. It seems this time preventive measures are being taken by local investors to safeguard them selves.
During the week S&P downgraded the rating of US from triple A to double A plus, which caused gold prices to reach $1, 800 per ounce. Furthermore the possibility of debt default by Italy and Spain continued to threaten global financial market. Concern over economic growth in US and major European economies remains a key issue in the upcoming week as well. During the week local stock market witnessed an outflow of $11 million indicating that investors are fairly correct about their decision.
The panicky behavior of the market can be gauged by the volatility of the market where out of 10 trading days during the month, bearish sentiment prevailed for seven days while the rest of the days the bulls controlled the market. Among the benevolent 100 stocks, 60 per cent traded in the green zone while 35 per cent were impacted by the bearish sentiment. Top gainer board was dominated by low cap stocks with KESC impressing investors with its return while a few other penny stocks followed.
The upcoming week can be considered as a test for the market, whether index will sustain the current level or not after preceding week’s jolt, said Bilal Asif at HMFS, adding that it is pertinent to note, investors may be skeptical whether to trade or not in such volatile conditions.

During the week State Bank conducted first T-bill auction subsequent to 50bps DR cut where it raised Rs182 billion including NCBs against the target of Rs170 billion causing net drainage of Rs7 billion from the system. Treasury yields witnessed contraction inline with trend in secondary yields as rates were slashed across the board. Primary yield on 3M, 6M and 12M paper were lowered by 45bps, 48bps and 53bps to 13.07 per cent, 13.28 per cent and 13.38 per cent respectively.
Accordingly the benchmark 6M KIBOR is down by 45bps since the rate cut to 13.36 per cent. During July 2011 money supply witnessed contraction of 2.7 per cent as the government retired Rs25 billion toward SBP while borrowing for budgetary support also decelerated to Rs17 billion. Lower inflation expectation and ease-off in market yields going forward are likely to benefit curve positioning towards the longer end.

Stock Specific Activity
Key results were announced during the past week by PSO, PPL, OGDC and ENGRO. PSO, posting earnings of Rs14.8 billion (EPS: 86.2) saw substantial growth of 63 per cent YoY, however disappointed with a final dividend payout of Rs2 per share indicting a cash starved position owing to circular debt issues. One good point however was net positive interest income. PPL and OGDC posted earnings growth of 35 per cent and 7 per cent YoY respectively. Engro’s earnings remained largely flat on account of higher financial charges as expected due to large debt levels of the company. However, the fertiliser segment saw substantial growth of 49 per cent in topline on the back of higher urea prices, whereas the food business recorded profitability and continued its healthy trend. A Rs2 per share dividend announced by the company was a positive signal indicating healthy cash situation. Key results expected to be announced in the coming week by PTC, MTL, NBP, and HBL.

Forward Looking Expectations
In light of strong macroeconomic fundamentals, there is reason to be optimistic about recovery prospects. This was seen in the form of the support offered by local investors when foreigners began their selling spree. We expect foreign investors to be frequent features in the selling category, at least for the near term. Local investors should be keen to pounce on low priced stocks and would prefer those companies having a strong domestic presence. From a technical standpoint, the market is heading towards under-priced terrain and is nearing the ‘right time to buy’ levels. The underlying premise in this is that the KSE-100 index remains the highest dividend yielding index in the region (~9.1 per cent). Because of this fund flows can be expected to find their way back to the market if things in the international front continue to be stressed.

KSE-100 VS Regional Indexes
To highlight the relative performance of the KSE-100 we have contrasted the index with other regional indexes, which would have closed at much lower levels if a common base starting point was assumed. The effects of the US downgrade were felt worldwide as equity markets dwindled on low investor confidence and fears of a double-dip recession. This led to broad based selling by foreign investors in Asian markets. However, our local market was shielded somewhat owing to robust macroeconomic fundamentals – mainly remittances and trade numbers – and also strong corporate results with above expectation dividend yields. To highlight this further, there was no need for external interference unlike that witnessed with the ban imposed on short selling in other markets.