LAHORE - Unresolved NATO supply issue coupled with worsening law and order in Karachi continued to hurt investors’ sentiments during last week. However, encouraging news flow regarding cement sector restored some confidence of the investors at local bourse. Overall mixed sentiments were witnessed at KSE with benchmark index (KSE-100) gaining 0.5 per cent WoW to close at 13,925 level. Average volumes also marginally improved by 8.4 per cent WoW to 156 million shares. A reversal of trend was seen from foreigners as they bought shares worth $12 million after last week’s selling.

Despite various discussions between stakeholders from Pakistan and US, the issue of reopening of NATO supply routes remained unresolved. In the NATO summit President Zardari gave no clear indication on reopening NATO supply routes anytime soon without the preconditions set by the country’s Parliament. US also remained firm on the apology issue on the Salala tragedy and its drone strikes policy.

According to news reports citing budgetary documents obtained from Ministry of Finance key economic targets were disclosed. For FY13, GDP growth target has been set at 4.3pc while inflation target is at 9.5pc. Current account deficit is anticipated at $4.8b for the same period.

Interest in the cement sector remained intact in anticipation of a positive budget for the cement sector along with increase in cement prices in the south.

Experts said that major market concern regarding source of income, cumbersome Capital Gain Tax (CGT) calculation and its rate have already been covered in the Finance (Amendment) Ordinance which is expected to become part of Finance Bill FY13.

If above ordinance becomes a part of finance bill then no source of income would be asked if investment in stock market is made for at least 45 days prior to the issuance of ordinance (April 24, 2012) or 120 days after its issuance till June 2014. Though not part of the budget, CGT rules may soon be announced by the FBR clarifying the ordinance passed by the President.

CGT rate is likely to remain fixed in Budget FY13. That is 10pc CGT if shares sold within 6 months while 8pc CGT if sold after 6 months but less than 1 year of holding.

KSE has proposed a tax differential of 5pc between listed (30pc) and unlisted firm (35pc) while a gradual reduction of corporate tax is proposed by SECP. It is expected the reduction of 1-2pc in corporate tax rate in budget FY13.

There are proposals that listed company not distributing a minimum percentage of profits as dividend should be penalised. However, chances of this happening are very low. It is proposed to extend tax rebate of 15pc on new listings from existing one year to five years but we do not expect this to happen.

For CGT on foreigners, KSE has again proposed that CGT to be calculated in terms of the currency in which investment is made rather-than in rupee value. However, experts do not expect any change in this budget as well.

The CGT Ordinance has already provided impetus to the market with average daily volume improving to Rs6b ($67m) since acceptance of SECP proposals by Finance Minister against Rs3.5b in 2011.

Improvement in volumes will result in better tax collection for the govt in FY13. CGT reforms will also help in better price discovery which will help companies and govt to raise funds through public offering and right shares.

Experts suggest that if corporate tax rate is reduced by 1-2pc, listed sector earnings would increase by 1.5-3pc. With last budget before election, govt will be focusing towards infrastructure development, power and trade. Thus experts believe the upcoming budget will have positive bearing particularly on cement and consumer sectors.

Corporate earnings to remain resilient with FY12 and FY13 profits to grow by 18pc and 14pc, respectively, better than last 5 year average earnings growth of 10pc.