LAHORE - The local bourse witnessed a volatile week as prolonged hearing of Prime Minister’s contempt of court charge dented investors’ sentiments. Furthermore, investors also adopted a cautious approach as they keenly await the SRO on changes in the Capital Gains Tax (CGT) regime. However, the benchmark KSE 100-index lost only 24 points (down 0.2 per cent WoW) to close at 13,273 level. Guarded sentiments can also be vindicated by decreased investor participation as average daily volumes dipped by 38 per cent WoW to 249 million shares. Foreigners maintained their interest in the market obtaining shares worth US$3.0 million, while the market also outperformed the regional peers by 0.4 per cent.
According to State Bank of Pakistan (SBP), country’s current account deficit (CAD) stood at US$2.95 billion in 8MFY12 against a deficit of US$0.19 billion in the same period last year. This was primarily driven by higher deficits of trade while services sector also took its toll on CAD figures. Additionally, slow foreign inflows augmented the concerns on deficit financing. Moreover, in its half yearly review SBP has highlighted that financing the CAD will be challenging given the fall in financial and capital inflows. For FY12, SBP projects CAD to hover in the range of 1.5-2.5 per cent of GDP with an upward bias.
Investor interest in the cement sector remained intact on the back of strong earnings outlook as both LUCK and DGKC outperformed the market by 2.2 per cent and 5.4 per cent respectively. Amongst other blue chip stocks, POL and UBL outperformed the market by 1.1 per cent and 3.1 per cent respectively as attractive valuations lured investors.
Samar Iqbal, an equity dealer, observed that during the week , market remained lacklustre and range-bound activity was witnessed. The benchmark index closed 0.18 per cent down while volumes declined by 29 per cent to Rs.4.48 billion. The reasons behind were rumours regarding delay in implementation of gains tax reform and hearing on PM contempt of court case. Engro gas supply also remained the key highlight of the week along with Packages lower than expected result for full year. Rally in cement stocks however remained supportive to index as investors believe that March results will be a turnaround story.
Due to long weekend investors preferred to remain on the sidelines. Volumes however remained confined towards small cap stocks as JSCL led the volume followed by ANL and BOP. The ongoing hearing in the Supreme Court is also disturbing investors who needs clarity before making investments
Experts said that ever since the acceptance of SECP’s gain tax proposal by Finance Minister, the local bourses has rallied 11 per cent in last 2-months. In addition, this rising trend is supported by some excellent corporate results and net inflow by foreign fund managers. The most interesting element of the recent run up in equity prices has been rising interest of investors in low price shares.
The unique and to some extent disturbing thing that is observed in the current rally was rising investors’ interest in low price stocks, especially those trading below Rs20. As shown in the accompanied table, the selected stocks have posted exceptional gains and that too with improving volumes. We think that low price shares does not mean attractive shares and investors should carefully analyze the fundamentals of such companies before jumping into that. As obvious from the table that large no of small cement stocks have also rallied due to change in sectors fundamentals thanks to record margin coupled with some improvement in sales volume.
Another reason why investors prefer these stocks is their high volatility. Unfortunately the structure of circuit breaker in Pakistan also promote more speculative activity in such stocks. Currently there is a 5 per cent upper and lower limit on stocks with price of Rs 20 or above. For stocks below Rs20, the upper and lower limit is in absolute terms (that is Re 1) and not in relative terms. For instance, a Rs3 stock can go up by 33 per cent in a day thereby providing big opportunities for high risk takers.
Another logical speculation behind this rally in low price small caps is the punt on takeover of those firms. Many small firms suffering from huge debt on their balance sheet or because of operational inefficiencies can be a potential takeover target. As also mentioned in our note dated Feb 17, 2010 in that case investors must carefully evaluate the company and should see whether there is any benefit in case there is a takeover. Otherwise we may see investors burning their fingers in such low price small caps.