Business

Weekly review: Mixed week at the KSE as market ends with a 0.4% decline

Index falls 1.8% in first three days, only to bounce back in the final two.

Bilal Umar February 05, 2011

KARACHI: A mixed week at the stock market ended with slight losses as the benchmark KSE-100 index fell 0.4 per cent (47 points) after witnessing a sharp decline in initial trading sessions of the week.

The week opened on a positive note as the State Bank of Pakistan announced on January 29 that it had decided to keep the discount rate unchanged for the next two months. Most analysts had expected another rate hike on the back of continued government borrowing and relentless climb in inflation.

Yet despite the unchanged rate, the first three trading sessions of the week saw the market decline by 1.78 per cent, primarily due to the ongoing crisis in Egypt. The crisis has resulted in oil prices climbing up to $100 per barrel, and is having spill-over effects in neighbouring Arab countries, which could have further negative impact on the world economy.

The government also announced at the start of the week that it would be keeping prices of petroleum products unchanged despite international oil prices climbing sharply. An earlier research report by JS Global had predicted that the economy will take a hit of $1.4 billion if the government does not adjust petroleum prices in tandem with crude prices in the international market. There was further bad news as reports began to circulate that the Ministry of Petroleum had decided to end the deemed duty on high speed diesel (HSD), which would affect oil refineries. The deemed duty on petroleum products was introduced to enable oil refineries to operate on higher margins so that they could upgrade their products. But according to a Judicial Commission report, this was never achieved.

As a result, it was recommended that ‘distorting concepts’ like deemed duty should be removed from the oil pricing mechanism. The petroleum ministry has since announced that the duty will be gradually phased out. This will result in a huge dent in the earnings of the country’s oil refineries.

Stocks of oil refineries nosedived on the announcement and the stock price of Pakistan Refinery fell 13.3 per cent, Attock Refinery fell 13.1 per cent and National Refinery fell 13 per cent during the week. Pakistan Refinery, expected to be taken over by Pakistan State Oil, was particularly hard hit as HSD forms more than 50 per cent of its product portfolio.

But the index rallied back and recouped its losses in the final trading sessions of the week on news that the margin trading system (MTS) was ready and could be implemented within a month’s time. Recent management changes in the Karachi Stock Exchange have led to acceleration of work on the product, which is a positive sign for investors, as it will inject liquidity into the market.

Volumes remained flat during the week and on average stood at 117 million shares per day. Foreigners also restricted their buying and were net buyers of $6.1 million worth of shares, the same as the previous week. The market capitalisation of the index dropped by 0.4 per cent and stood at Rs3.35 trillion at the end of the week.

Monday,January 31

The stock market see-sawed in the first trading session of the week as the index climbed 132 points in the first half before closing the day 103 points down.

Tuesday,February 1

Equities closed down in an exceptionally volatile session with reported local selling on news of rising fiscal deficit and uncertainty over refinery margins, according to dealers.

Wednesday,February 2

Stocks ended down as investors remained cautious following news of a possible removal of deemed duty collected by refineries.

Thursday,February 3

The local bourse managed to recover losses incurred over the past four days as investors turned bullish after the central bank’s quarterly report on the state of economy, say analysts.

Friday, February 4

The stock market rose on the last trading session of the week on renewed hopes for the introduction of a leverage product.

What to expect?

Stock-specific activity is expected to dominate proceedings in the coming week as sector heavyweights - PSO and MCB Bank - are to announce their results for the first half of the fiscal year. Volumes are expected to remain low for lack of a trigger.

Any news regarding the implementation of the MTS will be welcomed by investors and can provide the trigger, which the market currently needs.

Published in The Express Tribune, February 6^th, 2011.

COMMENTS (5)

Zazi | 13 years ago | Reply Tariq, Bilal and Max: Thanks for your input. Its market manipulation more than fundamentals that are driving the Pakistani market. FT.com article today says $7 billion has been withdrawn from the Emerging Markets following the revolt in Egypt whose economy was doing reasonably well (7% GDP growth). They produce their own Oil & Gas plus export it, allowing some relief from Brent and Texas Intermediate price fluctuations. Egypt before market close 12 days ago had dropped 17% in 2 prior days. How it fares when it opens we have yet to see. Even there the stock dividend yield refects money market rates. In Pakistan it has been the reverse. Higher interest rates lead to higher stock prices when they should be falling. Dividend yields do not match market indicies. Fundamentals are not really working. In 1997 there was a conference on Pakistan at Columbia University. Eqbal Z Ahmed was alive then and made a presentation followed by a Pakistani working at the IMF, who had prepared a paper on Pak Rupee exhange rate stability, This was at a time when the State Bank managed the exchange rate. The Paper was full of BS. I challenged his assumptions on basis of Pakistan's trade deficits and budget deficits. On my calculation the exchange rate should have been around Rs 60-65 per US Dollar (based on fundamentals) but instead was Rs 32-33, as money laundering by Pakistani industrialists (incl. Sharif's) and heroin exports (not captured as exports in trade figures) were being redeemed in the black market. In those days there were no formal Rate Exchange Companies and there was no flight of capital yet. Shaukat Aziz was also in the audience and we had exchange on this at conference close. Then when Shaukat Aziz became the Finance Minisiter they free floated the Rupee and it went to Rs76 per dollar before being managed by SBP to align at Rs60-62 parity. Today it is Rs 85-88 closer to fundamentals. But the Stock Exchange is completely out of synch for many years. That my 2 cents worth.

Bilal | 13 years ago | Reply Zazi: I personally think that the market has done its speculative run, and is in for a major correction in the coming months. When that correction starts is anybody's guess, but it will happen. Tariq: Every economy in the world is currently one way or another linked to the oil prices, and the stock market is an affected entity of these changes. There are obviously many other things which factor into the equation, but oil prices are definitely one of the main factors. Further, i do agree that our market is in the hands of major players who direct it to their will, whenever they please. But in the end, our stock market does resort to fundementals.

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Max | 13 years ago | Reply It's all in the numbers .. Index going up because earnings are gowing up despite all the weak macro-economic statistics plus 'stock markets are not a graphical illustration of country's economy' index heavy-weights are mostly comprised upon Oil and Gas Production and Exploration Companies and Banks. There is a close correlation of our market (in trend) with International Oil prices benchmarks.

tariq | 13 years ago | Reply our market is not at all linked with oil prices as u can see when oil was going up from 75 to 90 dollars our market was also going up its all linked with what these people BIG want the market to go specially ? this is what i think

Zazi | 13 years ago | Reply Here's a disconnect of all times. Stock Market indicies forecast corporate earnings (or estimates) into the future taking all other economic indications into account. In Pakistan stock prices and hence indicies, reflect some bizarre factors that keep stock prices and hence valuations high regardless to i.e., companies closing down due to gas and power outages though input prices are rising, food and general price inflation is impacting raw materials and labor, interest rate increases have raised debt servicing and amortization, cost of corruption or doing business is escalating and general insecuity requires additional expenses. Finally the recession that is eating away product sales growth. Why then are stock indicies at their high when they should be crashing? Corporate Finance 101 at HBS teaches that by using a HP12c calculator. Can someone exlain the logic, please?

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