Budget uncertainties bring the bears back to the market

KARACHI: The market failed to maintain the rally witnessed in the first week of June 2010 after the announcement of the federal budget for the fiscal year 2010-11.

The benchmark KSE-100 index fell by 1.7 per cent during the week ended June 11, after witnessing a surge of 1.2 per cent in the previous week. The federal budget failed to clear many issues that have worried investors and have kept them on the sideline.

Foremost among those issues was the uncertainty regarding the application of the Capital Gains Tax on the country’s stock markets.

The government announced that the CGT will be applicable to local bourses beginning July 1, but failed to provide specifics like expense adjustments and application on mutual funds etc. Furthermore, the announcement of the levy of advance tax on capital gains was a surprise for most investors and added to the market’s woes.

The management of the Karachi Stock Exchange (KSE)  was due to meet officials of the Federal Board of Revenue  (FBR) on Saturday to iron out details of the tax application and it is hoped that investors will have a clearer picture soon.

The market opened the week on a positive note, climbing 1.6 per cent on Monday, as investors were relieved that many of the dreaded changes they had expected in the budget were not announced.

But, over the course of the week, negative news slowly started to flow in as rumours surfaced that the International Monetary Fund would stop its funding programme because the government had failed to announce any concrete measures regarding the Value Added Tax implementation and resolving the circular debt issue which has crippled the country’s power system.

The government did not announce anything regarding the resolution of the circular debt issue despite having made bold claims of wiping out Rs116b of the inter-corporate debt in the power summit held in May. The World Bank and the Asian Development Bank have also announced that they will halt all programmes and projects until the VAT and power issues are resolved.

To further add to the negative news, rumours surfaced that the minimum turnover tax was being increased from 0.5 per cent to one per cent, which could severely impact the bottom line of several blue-chip companies like PSO, which might potentially lose 20-35 per cent of its earnings if the tax hike were to come into effect.

By the end of the week, the market had taken a severe beating and even the one per cent recovery on Friday was not enough to make up for the losses sustained and closed 166 points or 1.7 per cent lower compared to the previous week’s closing of 9,637 points. The market witnessed its worst daily decline for the year 2010 on Thursday when it crashed 3.1 per cent.

Average trading volumes were up by 15.6 per cent during the week but were still low and stood at a meagre 117m shares per day. Second-tier stocks like Lotte Pakistan and Jahangir Siddiqui and Company remained volume leaders throughout the week with selected interest in Engro, Kapco and Hub power stocks. As a result, average trading value was down 16.6 per cent to Rs3.2b.

Total market capitalisation of the KSE fell by 1.9 per cent to Rs2.67 trillion by the end of the week. Foreigners were again net buyers during the week, but at a lowly $1.4b. Individuals bought $4.4m worth of scrips while banks sold around $7.2m worth of stocks.

A lot is riding on this week’s meeting between the KSE and the FBR about the modalities of the CGT and will be the principal driving or dragging force of the market in the upcoming week.

There was also absence of news regarding the margin financing product after its draft approval by the law ministry last week, and more details might emerge in the upcoming week, which could also significantly impact the market.

Published in the Express Tribune, June 13^th, 2010.