KARACHI - The Bank of America Merrill Lynch, a leading global strategic advisor and underwriter, has predicted that the KSE 100-index may touch 11,000 points during current calendar year on account of monetary easing, reintroduction of leverage and upgrade of stock market to MSCI EM, which also do support a case for re-rating and 13.3 per cent EPS growth in CY11. According to Merrill Lynch report released on Friday, the abrupt capital gains tax imposition on stocks would pose a risk to market growth and capitalisation. As per report revelation, macro improvements are likely to be driven by creation of fiscal space paving way for monetary easing. Our preferences at KSE are also driven in that sequence with fiscal beneficiaries in the first round i.e. E&Ps (PPL, POL), OMCs (PSO), IPPs (Hubco) and fertilizers (Engro, FFC). While currently neutral on monetary beneficiaries, we would focus on banks (MCB) and cements in round two, report said. KSE trades at 7.8x CY10 earnings with 45 per cent discount to peers and 7 per cent dividend yield (390bp premium). Pertinent to note that even adjusting for growth and interest rate differences, KSE compares favourably to most peers, report added. Report pointed out that negative headlines around terrorism, the infamous floor imposition at KSE and macro vulnerabilities have dominated Pakistan scene over last couple of years but stand out feature of its investment case remains intact i.e. a domestic demand story (50 per cent of 170 million population is below 19) which is not correlated to peer markets. Unlike peers, Pakistan is a net importer (exports 11 per cent of GDP) and remains under-owned by foreigners (6-7 per cent of market cap). Report sees flag bearer of Pak non-correlation remains its potential of 100-150bp monetary easing (current DR: 12.5 per cent) in CY10, when peer markets face tightening. Macro discipline under the IMF has helped macros stabilise in the last 12-15 months where the next leg up remains contingent on due to commodity prices, better administrative measures to avoid hoarding and supply crises and sovereign flows from International Financial Institutions, the United States and Friends of Democratic Pakistan. While we do not underplay the importance of politics (NRO, Sharifs popularity, Army intentions, Pak-US equation) on sentiment, we believe from a structural perspective undivided government attention to the economy matters more than faces. History is testimony that reforms have been part of each governments agenda and have only been derailed at times of political noise. Plus with the IMF in the picture; room for individuality diminishes further, in our view. Active judiciary however remains a threat due to risk of populist decisions with scant regard to corporate profits. In addition, terrorism incidents in main cities not only pose risk to real productivity but could also test anti-terror resolve that has been a key feature over the last 6-8 months, report asserted.