LAHORE - Investors at the local bourse remained cautious throughout the week ahead of monetary policy. However, market expectations were realised when State Bank of Pakistan (SBP) opted to cut discount rate (DR) by 50bps on Friday to 9.5 per cent. This is the first time since July 2007 that the DR has come down to single digits, largely due to soft YTD CPI inflation. Overall the KSE-100 Index gained 37 points, up 0.2 per cent WoW. Market participation was limited as investors adopted a wait-and-see approach pre-MPS, with average volumes plunging by 43 per cent WoW to 136m shares. On net basis foreigners remained net sellers of $3.8m this week. Other key news highlights of the week include 1) LSM growth coming in at 1.95 per cent in 4MFY13; 2) Trade deficit decreasing by 20 per cent YoY in November 2012 and 3) local auto sales dipping by 3 per cent MoM in November 2012.

Experts said that with dull activity, local bourse closed at all time high of 16,845 index level. However, investors remained bullish in cement stocks on expectations of healthy earnings for the quarter while international call rate hearing and expectation of duty protection for local PTA manufacture kept PTC and LOTPTA also on investors’ radar.

After a phenomenal performance in 2012, analysts expect, Pakistan market will continue to perform in the new-year on the back of likely change in political setup and funds flow to equities after a sharp fall of 400bps in policy rate in last 18-months. Pakistan’s benchmark KSE 100 Index is expected to cross 19,500 in calendar year 2013 thereby resulting in a decent 17 per cent return (inclusive of dividend). Smart fund managers can easily make more than 20 per cent return based on timely portfolio restructuring. Major gains next year will be seen before the election, expected in May 2013, in line with past trend while the market may consolidate in 2H2013. Major risk to forecast comes from weakness in external account that may affect local currency.

In the upcoming general elections, it is expected that Nawaz Sharif’s PML-N can become the single largest party. This is also endorsed by recent polls and by-elections held in December. Probability is high that PML-N along with other smaller parties, either with or without Imran Khan’s PTI, will form the government which will be welcomed by the investors. Considered as business-friendly, PML-N has a track record of privatisation, infrastructure investment and pro-liberalisation policies.

Though declining yields on government securities and bank deposits have played a key role in bull-run of 2012, the actual impact will also be seen in 2013 where fixed income investors will find it difficult to re-invest their funds at higher rate, thus encouraging them to shift some of their funds to stock market. On the other hand, declining forex reserves will continue to post risk of any sharp fall in local currency against the US dollar. However, timely realisation of dollar inflows or any progress on IMF on the new loan can reduce pressure on the local currency.

It is advised to investors to focus on energy, cement and textile stocks in 2013. Top picks for the year are PPL, UBL, Hubco, DGKC and NML. We also look favorably towards OGDC, NBP, Lucky, PTCL and Adamjee Insurance. Mid caps with high leverage and consumer related business can perform better than large caps in 2013.

With materialisation of production flows from its key development assets, we expect Pakistan’s largest explorer, OGDC (Oil and Gas Development Corp) to outperform the broader market in the new-year 2013. Following 53 per cent growth in company’s earning in FY12, it is expected company to post an earnings of Rs26.2 per share in FY13, up 16 per cent from last year that can further go up to Rs29.2 per share in FY14. Though, experts continue to flag restricted payout capability of the company on account of circular debt, but near term volume triggers and improve pricing advocate company’s re-rating.