Market recovers in anticipation of strong financial results

LAHORE The equity market during the outgoing week showed some recovery in the hope of coming positive financial results amid huge foreign outflow and activity was witnessed in banking and fertilizer scrips. According to the experts, the KSE 100 index gained 1.1 percent or 130 points, as the political tensions have eased after the Sindh Governor resumed office and the US Congress Panel rejected the proposal to end all kinds of aids to Pakistan. Overall, average daily volumes strengthened by 149 percent to 85m shares. This improved performance at the local bourse was despite considerable foreign outflow of $22.3m. Key companies are scheduled to announce their quarterly earnings next week, mainly in banking and fertilizer sectors. As a result, scrip specific activities were witnessed in FFBL (up 1.1 percent) and NBP (up 3.4 percent). Moreover, cement scrips also remained in the limelight with LUCK and DGKC gaining 3.8 percent and 4.3 percent, respectively owing to expectation of strong earnings and rising retention prices. Current account registered a surplus of US$542mn in FY11, its first full year surplus since FY04 on increased receipts from exports and worker remittances. On the contrary, LSM data for May reported a contraction of 2.3 percent, led by a significant drop in production of electric equipment primarily due to increased power outages. Government borrowing too hit a historic high level of Rs2.9 trillion, up 33 percent owing to higher subsidies and rising current expenditure. Going forward, investors are set to turn their attention to the monetary policy announcement due on 30th July. MTS investment (as of Jul 21, 2011) stood at Rs247m, with average rate standing at 16.55 percent. Foreigners turned net sellers of worth $22.3m, while individuals concluded the week as net buyers of $37.4m. Experts said that the FY11 has not brought smiles on the face of investors who saw the KSE index value gain 28 percent with average daily value in the cash and futures market at Rs4.4bn, which represented a sharp plunge of 40 percent over the previous year, as the volume issue continued to haunt the capital market. The investors and brokers grieved the low volumes which plunged to a nine-year low as the investor remained at a distance concerning a number of issues. Firstly it is believed that the middle class investors were struck by the rising inflation and low incomes which restricted them to invest in the market. Moreover the economic recession also reduced the savings of middle class investor. Secondly, government borrowings had crowded out the private sector, resulting in high interest rates. Finally, the year witnessed huge transfer of money in the form of high commodity prices and government support to the undocumented rural sector that has displayed no interest in equity trading yet. Thirdly, the complex calculation of Capital Gains Tax (CGT) kept investors lazy to invest along with the fear of being crowded by the tax officials. Furthermore, lack of investor confidence resulting from the 2008 market crash was also one of the reasons of low retailer participation and volumes. These low volumes and lack of investor confidence compelled the SECP and KSE to hold a joint meeting where they discussed the current market conditions and necessary steps to be taken to resolve the issues being faced by the market. The measures discussed and agreed in the meeting include: For Deliverable Futures Contract market (DFM) initial margins it was agreed to be collect 50 percent in eligible securities and 50 percent in cash. Mandatory Basic Deposit required to take part in DFM has been withdrawn. A voluntary Roll over Facility shall be allowed for DFM by the Exchange, showing the rate of interest at which the transaction is offered to be rolled over. The existing list of eligible scrips in the MTS, DFM, and Margin Financing shall be reviewed to increase the number of securities in this list to enhance and augment the trading activity in various market segments especially the participation of retail investors.

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