Market in for rude awakening after solid week

KARACHI: The country’s stock markets are set to take a hit following the announcement of the monetary policy in which the State Bank increased the interest rate by 50 basis points to 13 per cent.

The announcement was made during after-market hours of Friday, the last trading day of the week. The news came as a shock to investors who had expected the central bank to keep the discount rate fixed at 12.5 per cent.

Investors had remained cautious ahead of the announcement as rumours circulated that a rate hike was on the cards. But there was widespread consensus among market participants that the rate would remain unchanged and a hike was unlikely.

Yaseen Anwar, the acting governor of the central bank, said the decision to revise the policy rate by 50 basis points was taken in an effort to contain persistent inflation and continuing fiscal slippages. The average CPI inflation of 11.7 per cent for FY10 exceeded the nine per cent target set by the government.

It is now likely that the market will witness a steep decline on Monday when the routine activity resumes.

During the week, the benchmark KSE-100 index witnessed solid gains on the back of strong corporate earnings announcements and climbed 2.2 per cent (223 points). The results of several fertiliser companies along with two of the country’s biggest banks were the catalyst for the market.

The fertiliser sector posted strong earnings on the back of high urea and di-ammonium phosphate (DAP) prices. The companies also announced good dividend payouts which resulted in significant activity in fertiliser scrips. Fauji Fertiliser Company and Engro Corporation rose by 3.5 per cent and 1.5 per cent, respectively, during the week.

Similarly, the banking sector posted strong results due to lower provisioning for non-performing loans (NPLs) and uptick in net interest income. Habib Bank Limited beat market expectations while United Bank Limited underperformed on expectations despite witnessing a 21 per cent increase in earnings for the half-year period.

Activity in scrips like PSO and Hubco was also witnessed. Hubco remained in the limelight early in the week on news that its Narowal project would go online earlier than expected. But towards the end of the week, PSO issued an ultimatum to the company to repay around Rs40 billion in dues or it would cut off credit sales to the company. PSO closed 2.2 per cent higher during the week, while Hubco rose five per cent despite declining by two per cent on Friday.

Average daily volumes increased by 1.1 per cent during the week but stood at a low 80 million shares, reflecting investor caution ahead of the monetary policy announcement. Average daily value, on the other hand, shot up by 13.1 per cent as there was significant activity in blue-chip stocks amid the earnings announcements.

Total market capitalisation of the KSE jumped by 2.1 per cent to Rs2.95 trillion by the end of the week. While foreigners were net buyers of $12.6 million worth of shares (down 10 per cent over the previous week), locals opted for profit-taking and companies sold $7.3 million and individuals sold $5.7 million worth of stocks during the week.

What to expect?

With the monetary policy announcement on Friday, the market can be expected to witness a significant decline in the coming week as the rate hike was surprising and the market is likely to react negatively.

On the other hand, a margin financing product has been finalised and only awaits approval of the SECP to be implemented at local bourses. Furthermore, corporate earnings announcements by heavyweights like MCB Bank, Pakistan Petroleum and PSO are likely to resist the decline induced by the discount rate hike.

Published in The Express Tribune, August 1^st, 2010.