The KSE-100’s downward spiral

Bilal Umar May 01, 2010

KARACHI: The stock market continued on with its downward trend as the benchmark KSE-100 index dropped 1.7 per cent during the week ended April 30, despite strong corporate results.

Lack of positive news flows, coupled with downward revisions of macro-economic targets and negative news regarding the global economy led to the KSE-100 index shedding 178.91 points during the week. To further add to the market’s woes, foreign inflows dropped by 16 per cent to $13.8m during the week, with a significant amount of $4.38m flowing out on Thursday alone.

This created selling pressure in the market over fears that foreigners may resort to taking their money out of the market in the coming weeks. Total foreign inflows for the year now stand at $222m and have been the major reason behind the stock markets upward rally in recent weeks. The arrival of the corporate results season had been anticipated to sustain this upward drive but in fact, the KSE-100 index ended up with a decline of 2.3 per cent during the two weeks of the results announcements.

By and large, the corporate sector continued to show impressive results with a majority of the companies either meeting or exceeding analyst’s expectations. On the whole, the corporate sector profitability grew eight per cent compared to the results for the same period last year. During the week, index heavy weights like Engro Corporation, Oil and Gas Development Company, National Bank of Pakistan and Pakistan Petroleum Limited announced healthy results but failed to impress investors and ended up losing value. Global news flows were also playing on the mind of investors as fears regarding Greece’s economic standing grew after its debt was downgraded to junk level.

Furthermore, the Goldman Sachs fraud saga remained in the limelight as the US Congress investigated the allegations against the company. These events can possibly lead to a more cautious approach by foreign investors and could dry up the inflows which have sustained the market’s upward drive. To cap off a forgettable week, the Government of Pakistan revised key macroeconomic targets and announced that inflation for FY09 will stand at 12.5 per cent (original target was 9.5 per cent) and Gross Domestic Product (GDP) to grow by three per cent (original target was 3.3 per cent), in line with the Asian Development Bank’s expectations.

There were some positives during the week, though, as the Finance Adviser, Dr. Abdul Hafeez Shaikh and International Monetary Fund (IMF) representatives said that an understanding had been reached on the fifth tranche of the IMF loan and a disbursement can be expected after a review on May 14. The tranche will considerably improve the country’s foreign reserves which currently stand at around $15b. During the week, average volumes fell sharply by 28.3 per cent after declining 38.5 per cent during the previous week and stood at a lowly 113.2m shares per day. The low volumes can be attributed to the lack of positive news flows and a general profit-taking trend in the stock market.

All local investors were net sellers during the week as they engaged in profit-taking as mutual funds sold $4.1m worth of stocks while companies and banks sold $3.4m worth of stocks each. With the results season concluded, the market will shift its focus towards news flows surrounding the upcoming budget for the fiscal year 2010- 11. Furthermore, the resolution of the circular debt issue along with the disbursement of the IMF loan will be crucial factors in the performance of the stock market. Lastly, the trend of foreign inflows will also be a key determinant, especially considering that foreigners now own more than a quarter of equities on the stock market.

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