The current week turned out to be a disastrous one for the investors as the benchmark return depleted in a fast and furious manner. Before the onset of December, the year to date index return was -4.07 per cent which was nearly double in the current month at 8.3per cent. The twin sword cut the investors confidence hence the investment arena firstly the domestic political warfare after the recent Memogate issues pushed the investors towards the wall.
Adding to the domestic induced drama, was Uncle Sam’s decision to free $700 million in aid unless measures were implemented to curb the cross border transport of ammonium nitrate used to manufacture IEDs. The unfolding of gloomy economic outlook kept the prudent investors worried. Without the buoyant cotton prices which supported us well in the preceding year, we believe the current fiscal year seems extremely tough for economic managers of the country, said Bilal Asif at HMFS.
The political warfare continued to hinder capital formation and foreign direct investment in the country. Furthermore local investors are looking at the situation and preferred to stay away from any such adventurism. He believes that inflation is no more our major concern but rather the weak macro economic fundamentals especially the external account position and export growth, IMF payment of $23 billion in CY12, budget deficit and sustainability of remittances at current level are the major hurdles.
The preceding month exports posted a decline of 18.1 per cent MoM and 10 per cent YoY magnified the investors concerns. The current account deficit to date (Oct-2011) has already surpassed the $1.5 billion mark and the FY12 target level of 0.6 per cent of GDP. We believe the current account deficit may easily breach the 1.5 per cent mark while budget deficit can easily surpass 6.2per cent (Base case on standalone basis), he added. The above mentioned economic numbers impacted the Pakistani Rupee parity; hence the Rupee posted a depreciation of 4.2 per cent to Rs89.61. It is believed that Rupee may continue to depreciate further in the upcoming month and may reach the PKR94 level.
Looking at the index weighted stocks, 76 per cent of the benevolent stocks traded in the negative territory while 10per cent remain unchanged. Engro finally after a long time breached the Rs100 mark with investors shouting Engro can’t grow. Furthermore FFBL and Fatima also witnessed the same kind of value erosion. In the light of negative sentiments very few stocks with limited free float posted positive return during the week.
The twin sword of economic challenges and worthless political battle or government incompetence continued to dent the investor’s sentiment. Election campaign for CY13 has already in full swing and we believe the blame game will continue to play. The memogate issue may have long term repercussions on the current political setup in the upcoming few weeks. We believe during the interim period investor sentiment may remain weak.
T-bill Auction: All the bids were rejected in last week’s T-bill auction by ministry of finance owing to higher bid rates than the previous auction along with low investor participation. The government had set the target of Rs100 billion against the maturities of Rs99 billion while it received the bid amounting to Rs45 billion. Lower investor participation can be attributed to the Year End effect as commercial bank offered competitive rates to attract higher deposits.
Government’s borrowing from SBP, which climbed up by Rs84 billion for week ending Dec ‘2, could further escalate at the cost of short term liquidity in the banking channel. Excluding circular debt adjustment amount, government borrowing from commercial bank has also jumped by astounding Rs300 billion during 5MFY12. Pressure on external accounts and dwindling reserves have created further perils for the local currency which has depreciated by staggering 4.26 per cent on FYTD basis.
