AKD Quotidian about — Pakistan Market: Make hay while the sun shines!

Karachi, February 22, 2013 (PPI-OT): The benchmark KSE-100 Index crossed the 18,000 points mark in intraday trade today, with CVTD gains expanding to 6.0%, amidst excitement over ongoing results season (CVI 2/1HFY13) that has successfully countered political noise/weak external position.

According to AKD Securities the bull run extension has been driven by continued foreign interest (CYTD net FPI: US$38mn) with best-in-class stocks (e.g. MCB and OGDC) among the blue-chip winners.

That said, AKD Securities reiterates that the market could face stumbling blocks over the course of the year on potential political volatility and a likely return to the IMF with adverse implications for interest rates and the PkR exchange rate.

In this regard, precedence indicates that PkR weakness understandably dovetails with FPI outflow and similar dynamics could potentially untold as fx reserves slip and the import cover drops below comfortable levels. Any correction however, would be an excellent time to build fresh positions where Arif Habib Limited Dec’13 Index target is 19,250 points

FPI and PkRJUS$ parity: After CY12 net FR of US$126mn, net FPI has clocked in at a further US$38mnCYTD. This is despite PkR/US$ depreciation of 9.0% since the start of CY1 2 where the KSE-1 00 Index’s robust gains (49% in CY12 and 6.0%CYTD) have more than compensated for currency losses. That said, with the weak BoP position implying slippages in the PkR/US$ parity, AKD Securities flags risks to the ongoing positive FR trend where Arif Habib Limited resents domestic fund manager survey indicates the PkR/US$ exchange rate could swiftly slide to 105 by end-CY13 (maximum: PkR12O/US$) implying PkR depreciation of at least –8% across CY13. With consensus Index targets implying a CY13 market return of 13%, relatively subdued US$-based returns could potentially retard the trend of incoming FPI flows.

Investment Perspective: With the bulls continuing to dominate market sentiment, the KSE-100 Index could potentially extend its upsurge over the next few months. That said, AKD Securities cautions that tougher headlines (politics/macros) could potentially undermine strong corporate profitability and attractive valuations (forward PIE: 7.9x; at a 39% discount to the region), particularly if FPI trend shuts to outflows. As such, while AKD Securities reiterates AKD Security’s Indexes targets (Jun’13: 18,500 points; Dec’13: 19,250 points), market trend across the course of the year is unlikely to be linear. In this regard, while AKD Securities flags risks in the near-term, AKD Securities would take any correction in the market as an excellent opportunity to build fresh positions.

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