Morning Call about – KSE: Asia’s top market in return and FF despite currency attrition! – Arif Habib Limited

Karachi, July 19, 2013 (PPI-OT): World equities declined, and then recovered, KSE least affected so far! With the FED’s (US Federal Reserve) call for no-rush for a cut in stimulus package (US$ 85bn per month for bond buying) has once again supported financial and commodity markets around the globe.

According to Arif Habib Limited equities, commodities and bonds were severely battered in Jun’13 when FED called for a possible withdrawal of the on-going stimulus provided the economic revival stays alive.

Keeping Arif Habib Limited analysis to equities only, Arif Habib Limited saw world markets shattering to nerves as a result of only a change in words of the FED over stimulus strategy, and the most-flourishing Asia Pacific equities faced massive decline during Jun’13 due to fear of foreign funds withdrawal amid domestic currency depreciation against the greenback.

However, with the Jun’13 close when all the regional markets were almost in red zone, KSE recorded one of the lowest declines amongst regional peers while delivering a fat 52.2% (44.5% in USD) in FY13 period against last year’s 10.45% (0.4% in USD terms), against Asia Pac’s average 18.2% in FY13.

KSE100 on top in Asia Pac with FF unhindered despite currency attrition KSE100 has commenced the new fiscal year (FY14) on a solid note and the benchmark has so far, in Jul’13, recorded a massive 8.6%, not only topping the Asia Pac region but also the key MSCI indices’ returns (see table alongside).

Encouragingly, despite faster-than-regional average currency depreciation during Jul’13 (1.2% MTD), FF (foreign flows) to Pak equities have been flowing in undeterred (US$ 21mn MTD, US$ 432mn YTD’13) where other regional markets have experienced massive outflows, not only in Jun’13 but during current month as well.

Commencement of the full-year corporate result season from mid-Jul’13 onwards alongside positive impacts of the currency depreciation on key market- driving sectors (impact given on next page) have kept KSE buoyant so far.

Volumes flourishing in short-timed Ramazan sessions after a long time Encouraging enough, average traded volumes at KSE in the month of Ramadan have also been prosperous so far, like no other month of Ramadan in the last decade at least (average volumes at 190mn shares so far against last decade’s average 146mn shares with exception of 2005 and 2007 when average volumes were recorded over 250mn and 300mn, respectively).

PKR depreciation to support IPPs, Textiles, E and Ps, Telecom and Chemicals With the decline in PKR against the greenback in Jul’13 (1.2% MTD, 3.8% YTD), Arif Habib Limited expects Jul-Sep’13 quarter earnings for key sectors to further beef up n addition to the support provided through the recent cut in the policy rate by the central bank (50bps to 9%).

Sectors benefiting from the local currency decline include IPPs (USD-based return mechanism), Textiles (for improved exports), EandPs (USD-based product pricing), Telecom (USD-based LDI earnings), Chemicals (USD-denominated margins) while the situation stands mixed for Cements (fuel import cost v/s cement exports).

Company-wise earnings impact is provided in the table alongside. Moreover, recent development on part resolution of the notorious circular debt to the tune of PKR 322-326bn out of total PKR 503bn, would set a milestone in the energy and Oil and Gas sector recovery and should positively benefit these sectors’ stocks (HUBC, KAPCO, NCPL, NCL, PKGP, PSO, PPL, OGDC) with better dividend announcements at Jun’13 results on account of better cash positions of the stated companies.

The recent cut in policy rate by the SBP should also provide further support to corporate sector profits ahead (especially highly leveraged Cements, Textiles and few Fertilizers).

Currently, the KSE100 is trading at a 2014 forward PE of 7.4x and an attractive dividend yield of 6.3%.

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