KSE-100 breaches the 10,000 barrier as rally continues

KARACHI: The market maintained its upward momentum during the week ended July 16 as the benchmark KSE-100 rose 1.8 per cent (179.45 points) on the back of a 2.8 per cent gain witnessed in the previous week.

The index currently stands at 10,154 points, well clear of the 10,000 points psychological barrier. The index had breached the level in the first quarter of 2010, only to decline sharply in the following quarter.

As predicted by analysts, the impact of the positive news flow from the previous week trickled down into the current week, as investors remained upbeat about the introduction of a margin financing product. It was expected that the Securities and Exchange Commission of Pakistan (SECP) will finalise the modalities of the product on Friday and an announcement regarding its reintroduction will be made in the coming week. Details of the product are yet to be made public, but it is expected that the product will be investor friendly.

Foreign inflows continued to play an important part in the market’s gains, despite dropping to $5.7 million (down 41 per cent) as rumours circulated regarding foreign interest in the National Bank of Pakistan, which rose 6.3 per cent as a result. Similarly, the Oil and Gas Development Company also rose 2.2 per cent due to foreign buying.

Foreign interest was also seen in the fertiliser sector, which resulted in gains for a majority of fertiliser companies, led by Fauji Fertiliser Bin Qasim (up 5.9 per cent) and Fauji Fertiliser Company (up 2.6 per cent). Engro Corporation’s stock also posted gains.

Macro data takes centre stage

Macroeconomic data also took centre-stage during the week, as final numbers for financial year 2009-10 began to flow in. On the whole, the numbers were a mixed bag which nullified the impact of one another.

Positive numbers were led by the current account deficit shrinking by 62 per cent to $3.5 billion for the year as a result of high remittances and foreign inflows from the Coalition Support Fund. Furthermore, the country recorded its highest exports to date, clocking in at $19.4 billion, surpassing the expected target and helping reduce the trade deficit by 10.5 per cent to $15 billion.

Negative numbers were led by inflation data, which, although down to 11.73 per cent from 20 per cent a year ago, exceeded the target and remains the likely reason why the central bank will not reduce discount rate in its upcoming monetary policy at the end of the month.

According to analysts at KASB Securities, of greater concern were provisional numbers depicting that fiscal deficit for FY10 surged to 6.2 per cent of gross domestic product compared to the International Monetary Fund’s target of 5.2 per cent and the same could spill over to FY11 when fiscal deficit could touch 5.2 per cent compared to the budgeted four per cent.

Fiscal slippage poses an upside risk to market yields and hence policy rate and the same reflected in increased participation in three-month treasury bills in an auction during the week.

Total capitalisation of the KSE jumped by 1.8 per cent to Rs2.85 trillion by the end of the week. Foreigners were net buyers while local companies sold $6 million worth of stocks during the week.

What to expect?

Analysts believe that although sentiments will continue to be dictated by clarity regarding the Capital Gains Tax and the reintroduction of the margin product, there are two things for investors to look forward to. The first is the upcoming results season, which can deliver some positive surprises and trigger a rally.

The second is the monetary policy announcement. The central bank has maintained status quo for almost half a year now, and investors now expect a rate cut. But, with inflation numbers still high, it will be very difficult for the State Bank to reduce the discount rate, with some officials even suggesting that a rate hike might occur.

Published in The Express Tribune, July 18^th, 2010.