LAHORE - During the week, investors opted for a cautious stance before federal budget which is expected to be presented on 1st June, 2012. The improving US-Pak ties amid talks of reopening route for NATO supplies and President invitation to attend NATO summit were unable to positively impact the market performance. On the macro front, Current Account deficit was reported at $3.39b during 10MFY12. Furthermore, PPL is to bid for corporate acquisition of MND Exploration and Production Limited. Consequently, the KSE-100 index closed at 13,858 down 2.6 per cent WoW. Deteriorating investor confidence can also be gauged through depressed average daily volumes of 144m shares, down 45 per cent WoW. Foreigners were net sellers of $6.0m. Federal budget for FY13 is scheduled to be announced on 1st June, 2012. In the upcoming budget , Finance Minister has stated that there would be no increase in the tax rate and the theme would be to broaden the tax base rather than putting burden on the existing tax payers. SBP reported Current Account deficit for April, which came in at $313m. It takes the cumulative figure for 10MFY12 to a deficit of $3.39b during 10MFY12, compared to a surplus of $446m in the same period last year. PPL is to bid for corporate acquisition of MND Exploration and Production Limited, the company has assets in Pakistan and Yemen. Moreover, Petroleum Ministry has sought approval to authorise PPL to pursue Iraq’s exploration opportunity on standalone basis with $100m limit, or pursue a larger exploration programme in joint venture with another company. However, PPL underperformed the market by 0.2 per cent WoW.Experts said that institutional profit-taking, limited foreign interest, cautious trade ahead of federal budget announcement due next month and concerns for rising current account deficit played a catalyst role in bearish sentiments at KSE despite hopes for improvement in Pak-US relations on resumption of NATO suppliesExperts said that inline with the expectations, federal govt remained unsuccessful in procuring funds from foreign sources during outgoing year, consequently affecting the flow of foreign private investment. Limited progress on foreign side massively weakened the domestic economy, while entire deficit financing had to be funded through domestic sources. The budgeted provincial surplus contribution till date has remained below par, due to the excessive spending incurred by Punjab and Sindh province. The former encountered an outbreak of Dengue fever while the latter was hit again by heavy rains. On the policy front, govt. had a mixed year. The government continuously passed down higher oil prices to the consumer, removed subsidy from the feed stock gas prices and passed the law for the independence of the SBP. However, where the govt failed to make progress was in energy and tax reforms. Due to this, the much needed impetus from the SBP through monetary easing and higher development funding by federal govt remained a distant dream in FY12. Despite financing difficulties the SBP played a crucial role in keeping the market liquid and striking a balance between growth and inflation. In future we see 1) restoration of foreign flows, 2) IMF loan re-payments and 3) containment of deficit and in turn reduction of its reliance on domestic borrowing, as main challenges to be faced by the economy. From equity market’s vantage point, a key note of interest will be the inclusion of the Presidential Ordinance on Capital Gain Tax (CGT) in the Finance Bill. Secondly, the SECP and the KSE have proposed a reduction in the corporate tax rate to encourage listing at the local bourses. We expect a cut of 1-2 per cent from the existing 35 per cent. For every reduction of 1 per cent in corporate tax rate, we calculate our earnings growth forecast for FY13 to grow by 1.7ppt from the present 10 per cent. We retain our optimism at KSE on the back of expected strong earnings growth. Our top picks are: POL, PPL, PSO, HUBC, DGKC, PTC and NBP.Experts said that international economic conditions and fall in equity and commodity markets shattered local investors’ sentiments in spite of improvements in Pak-US relationship and expected reopening of NATO supply. Karachi market closed around 3 per cent down with volumes also declined by 48 per cent to an average Rs.5b on week-on-week basis. PTC remained in the limelight during the week and fell after no developments on the International clearing house front. While DGKC lost 10 per cent amid news flows that cement prices particularly in North declined by Rs 10-15 per beg.