Karachi Stock Exchange (KSE): Cautious investor remained sideline in 2011

Faizan Saleem


The year 2011 has proved to be the gloomy year for the equity market of Pakistan amid absence of retail investors, rising macroeconomic concerns, worsening law & order situation and lack of positive triggers in the market. The benchmark KSE-100 index witnessed thin trading sessions throughout the year closed at 11,347.66 points, down by 5 percent.

The market is seriously missing the participation of retail investors as several challenging issues kept them away from the market like Capital Gain Tax (CGT) and insufficient leverage through margin products. Moreover, the element of foreign investments has always remained the core for the Karachi Stock Exchange (KSE).

But, most notably and alarmingly, the outgoing year saw major foreign portfolio investment wiped away sharply from the capital markets of Pakistan owing to weak global economic outlook and rising risk level. During the year, the foreign investors have withdrawn their 127.21 million worth of investment from the KSE following the fall in major indices around the world, while the foreigners injected massive money inflow of $526.73 million in the market last year.
The most sectors listed on KSE depicted lackluster performance, a few managed to deliver stellar returns, Food producers and chemicals notched a top position on back of strong cost pass through ability followed by Oil & Gas, Electricity and Personal Goods, says the research note of AKD Securities Ltd.

The major issues faced by the listed companies remained the circular debt, gas shortages, lower cotton prices, severe load shedding, strained Pak-US ties and worsening law & order situation particularly in the financial hub of the country during the summer. Floods also had their impact on the economy and led to declining farm incomes and depressed demand for consumer durables from rural consumers.

The economic indicators performed better than the expectation in the first half of the ongoing financial year, but the trend may see strong challenges due to deteriorating position on macroeconomic front. The State Bank of Pakistan (SBP) also adopted the lenient monetary stance in the second half, but the move didn’t prove to regain the confidence of cautious investors.

Double trouble for fertilizer sector in 2012

Faizan Saleem

New Year 2012 is going to be the hard-hitting for the fertilizer manufacturers owing to imposition of Gas Infrastructure Development Surcharge (GIDS), persistent gas shortages, increasing sector regulation and declining spread between local and international fertilizer prices.

The troubles of the fertilizer sector of Pakistan are already swelling day by day amid decline in urea demand and continuation of gas curtailment. Moreover, the massive improvement in the global fertilizer’s production and weak commodity prices also aggravating the gloomy situation presently.

The local urea prices have crossed the mark of Rs 1,580 per bag, hence there would be a little room for the local manufacturers to raise the urea prices in near future particularly in the backdrop of falling international prices, predicts the research note of AKD securities.

However, after the implementation of proposed gas surcharges in the form of GIDS, the manufacturers could pass on the cost burden to the local farmers but it would not supplement the earnings of the fertile manufacturers.

According to the note, the increase of Rs 197/mmbtu in feed stock coupled with 14 percent increase in fuel stock prices could bring another round of price hike as manufacturers would pass on the cost impact to the consumers.

However, the earnings of the fertilizer manufacturers are unlikely to take the positive impact as this will take local urea prices at par with the international urea prices limiting manufacturer’s ability to further increase the prices irrespective of the gas supply situation.

During the month of November, the fertilizer offtake remained daunting as both urea and DAP sales plunged by 12 percent and 22 percent respectively. The higher fertilizer prices along with weak farmers income has drag down the demand of fertilizer.

The future of the fertilizer seems in line with the supply of gas flow to the manufacturers. The urea production is expected to remain hampered till January as the gas crisis is taking its toll amid winter season. Hence, the government would more rely on imported urea which would exert further pressure on the soaring import bill of the country.

http://www.halaltamweel.com/2011/12/30/News/Double-trouble-for-fertilizer-sector-in-2012/2963/Story.aspx

Year 2011: Gas crisis kept textile sector on its toll

Faizan Saleem

The year 2011 has proved to be the mixed year for the textile industry of Pakistan as it faced the ups and downs in the same year ranging from sharp fall in global commodity prices to severe energy crisis.

The cotton prices touched its highest level in March 2011 resulting in windfall gains for the textile sector during first half of the year but the favorable situation didn’t last for the longer time period.

The Pakistan cotton association is expecting to reach 12.6 million bales, which is 8 percent above from the previous year. However, the textile sector of Pakistan is facing severe problem of gas shortages along with lower cotton prices posing doubts on the expected target.

The textile sector has been the worst hit of the prevailing gas crisis in the country during the year as their plants are solely dependent upon the supply of gas. Since the start of the year, the country has faced acute gas shortages resulting in massive production losses or reliance on expensive alternate fuel such as diesel. Hence, the operational costs of the manufacturers remained higher leaving them behind in the export market.

The profitability of the sector also witnessed major dent due to lower cotton prices and improved global cotton production.

The profitability of the spinning units will be affected the most; Spinners will not be able to make windfall gains which they had made last year on account of continuously rising prices and supply concerns, said by Bilal Qamar-analyst at JS Global Capital Limited.

He further stated that the standalone weaving units and other value added units will benefit due to lower yarn prices and composite units like Nishat Mills Limited (NML) and Nishat Chunian Limited (NCL) could manage the current situation as they are elastic in switching focus in-between their segments.

The future of the textile industry is reliant on the smooth supply of gas which doesn’t seem to be resolved in near future. Moreover, the recent hike proposed by the ministry of petroleum is likely to create further problem for the sector. The estimated target is expected to be achieved by the end of financial year, but the lower cotton prices could put pressure on the overall exports of the country.

Several textile mills have closed in recent past and some have shifted their production facilities to Bangladesh.

Resolution of energy crisis which requires souring alternate energy resources, resolution of circular debt and improving security environment for facilitating exploratory operations and inviting investment in the sector are vital.

http://www.halaltamweel.com/2011/12/29/News/Year-2011--Gas-crisis-kept-textile-sector-on-its-toll/2943/Story.aspx

Weak International coal prices to help cement sector

Faizan Saleem

The coal prices in the international market are heading southwards owing to weak economic conditions in major parts of the world including Europe and United States along with sluggish economic growth. However, the weak coal prices would be helpful in supplementing the earnings of local cement manufacturers.

In previous years, it has been witnessed that historically coal prices remain higher in winter due to strong demand.

But, this time, the deteriorating economic conditions in Europe and US coupled with retrenching developing market growth has led to a slide in coal prices to US$102.2/ton, said Furqan Ayub, research analyst at JS Global Capital Limited.

However, the global demand of coal is expected to remain firm in coming year due to increased reliance on thermal power generation and strong industrial growth in China. During the first five months of the current fiscal year (Jul-Nov), the cement demand in the country posted a moderate growth of 3.54 percent.

He further said that the higher cement prices along with weak coal prices bode well for the future earnings of the cement manufacturers. Higher cement prices and contained coal prices are triggers that have gone somewhat unnoticed amid the weak sentiments prevailing in the market.

Even if coal prices take a U-turn from here, cement prices are firm enough to sustain healthy margins of the manufacturers.

In Pakistan, the cement manufacturers are currently enjoying higher level of cement prices even in winter season when construction activities remained on halt. Even, the weak coal prices are going to ease off the pressure from the operational cost of the company providing further boost to the margins of the manufacturers.

This development together with rupee depreciation will help making Pakistan cement more attractive to the rest of the world. But, the concern going forward is that cement demand in rest of the world may remain low as most developed countries are going through an economic turmoil. China, which is still growing is self sufficient in cement making and hence, now the major task will be to search new markets besides India and Afghanistan.

http://www.halaltamweel.com/2011/12/28/News/Weak-Int-l-coal-prices-to-help-cement-sector-/2912/Story.aspx

Currency swap: Positive step to provide trade atmosphere

Faizan Saleem

The Government of Pakistan looks determined to ease rising pressure from the Pakistan currency which touched to its lowest level in the month of December.

In this regard, the Government has started to exclude the need of dollar by carrying out transactions in the local currencies. In this regard, it has signed two swap agreements with Turkey and China to promote trade and business relations between the countries.

The bilateral currency swap agreement is of 10 billion Chinese Yuan ($1.58 billion) for 140 billion Pakistani rupees ($1.57 billion) which would end in three years.

The Pak rupee against the US dollar has remained unstable since the start of the financial year owing to deteriorated ties of Pak-US and liquidity shortages. Moreover, the external situation is expected to remain uncertain in upcoming months as the global economic outlook is unlikely to get revived and could drive further deterioration on the external front.

Decline in FDI has been compensated by remittances but, with trade gap to widen after surge in oil prices, country needs to boost its value added exports. PKR depreciation will have negative impact on current account deficit, inflation, and among specific industries; it will have negative impact on auto sector.

In such situation, the currency swap arrangements with other major trading partners could reduce dollar demand and stabilize the rupee. Through this currency swap facility, the traders and businessmen of the respective countries would be able to trade in their respective currencies obviating the need to look for dollars or other foreign currencies to do business.

The deterioration in Pakistan rupee was mainly due to higher demand of US dollar to payoff hefty oil import bill and debt payments, which is expected to rise in the second half of the financial year. Pakistan government also has to pay back $1.4 billion to the International Monetary Fund (IMF) in the month of Feb-2012 as first installment of the loan of $8.7 billion.

The business community hails the efforts of the government as dealing in local currency would provide more conducive atmosphere to execute trade deal. China and Turkey are the major trading partners of Pakistan and this step would also help to narrow down the trade deficit as well. It would also help to save the dollar reserves of the country which could be used in some productive avenue.

http://halaltamweel.com/2011/12/27/News/Currency-swap--Positive-step-to-provide-trade-atmosphere/2878/Story.aspx

Pakistani Currency: Dark clouds still exist

Pakistan Currency against the US dollar has remained volatile since the beginning of the financial year 2012 mainly due to strained relationship between Pak-US and liquidity shortages.

The situation is expected to remain precarious in later part of the year as the global economic outlook is unlikely to get revitalized and could drive further deterioration on the external front.

The sluggish growth in exports, due to weaker commodity prices and severe energy crisis in the country, is also playing its role in currency deterioration. Furthermore, the slow demand of Pakistani products in other countries due to weak global economic growth also aggravated the ailing situation.

The persistent rise in import bill put immense pressure on the current account deficit of the country, especially with resurge in oil prices lately. The massive increase in the consumption of oil products due to gas outages resulted in widening of trade deficit and increasing the burden of oil import bill on the economy.

Foreign portfolio investment has also dried up and foreign institutional investors had been net sellers consistently during last two months on most trading days. The trust deficit shown by foreign investors has also affected the sentiments of local investors as well who are also active in making their capitals fly to other regions.

The massive pressure on the foreign reserves is yet to come in the form of repayments of outstanding loans in the second half of the fiscal year, which could further deteriorate on the already weakening position of the rupee.

Moreover, the strained relationship with the United States after the recent NATO attack on Pakistani soldiers could also halt the flow of money coming in the economy in the form of Coalition Support Fund.

The only area which has supported the Pakistan currency has been the remittances sent by overseas Pakistani employed abroad. But, this could also suffer particularly after the weaker global economic outlook and massive increase in unemployment rate of major economic powers of the world.

It is hoped that current relaxation in policy rate by the central bank could provide necessary impetus to the export oriented industries, but they require support from supply side too to remain competitive.

http://www.halaltamweel.com/2011/12/24/News/Pakistani-Currency--Dark-clouds-still-exist/2845/Story.aspx

Strained Pak US ties not to affect economy

KARACHI: The relationship between the two major allies, Pakistan and the United States has been remained patchy during the year, following series of unfavorable events.

A stream of incidents ranging from Raymond Davis issue to the latest NATO strikes on Pakistan forces in Salala has jolted an affiliation between two countries to fight against terrorism.

Nowadays, the subject matter of every economic expert is to ascertain the repercussions of strained relationship on the economy of Pakistan if it leads to a deadlock between the two countries. It means that there will be no more financial assistance injection soon in the economy of Pakistan.

Recently, the US senate approved a bill entailing the freeze of $700 million aid. The fundamental question that arises is how the US aid restrictions will impact Pakistan’s economy?

If US decides to block all aid, the damage to the economy is relatively limited given Pakistan pursues its economic reforms and increase savings, says the research note of JS Global Capital Limited

In Pakistan, the economic dependence on the US aid has been overstated; however, situation is not vulnerable to that extent. Pakistan has received $17.8 billion in the form of military and economic aid. Thus, the total contribution is insignificant, standing at 0.8 percent of GDP and 2.7 percent of external trade.

According to the research note, the major chunk of the US aid is not cash dollar transfers to the government, but in the form of military assistance. On economic aid front, the bulk of the money is channeled through USAID or other NGO’s. This impacts the social sector more but from the perspective of the balance of payment funding, it has a minimal impact.

Hence, if the US completely freezes its foreign aid to Pakistan; then its adverse impact on the economy of Pakistan could be ruled out. However, the social development and military assistance could be deeply affected.

In such a scenario, it is imperative that government should looks to tighten its belt by controlling expenditures, taking tax reforms and measures to expand the tax base and revenues and if that can be achieved, it will relieve the money market and crowding out of private sector investment will become avoidable. Supply side reforms are also needed to make any meaningful policy move effective.