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Stock market review for year 2012

Published on 31st dec, 2012, Edition 01, 2013

 

Pakistan’s stock markets, particularly KSE is known worldwide for providing the best returns among global stock exchanges. KSE index more recently was expected to show a decline and expected not to breach the hypothetical index value of 16,000. The stock market on the contrary is trading at 16,800 points. As on 30-Dec-11, KSE was trading at 11,347 points giving an annual return to date of 41 percent which is the highest among any of the stock exchanges globally. A positive sign is the implementation of the Free Float Index commencing on Monday 15 October 2012 which has revamped the traditional KSE-100 index. Previously, KSE-100 index was designed on market capitalization to determine the weights of stocks. KSE-100 therefore accounted for total shares in the market times the stock price which showed the total market capitalization. The free float index will only account for only those under free float.

A general investor would always like the index to be higher so that both dividend and capital gains guarantee decent returns. Investment in the stock market however is a game of greed where the market movements are largely correlated with macro economic and micro issues in the economy. The market movement shows variations in the most superficial of issues with change in valuation from “buy” to “sell” and vice versa immediately as the news become public. During the days when rumors were circulating of privatization of PSO, the stock price would show a decline of more than 20 percent before the press conference or statement by PSO and would reach its previous threshold the following day. Markets would therefore correct immediately as information becomes public.

Though predicting the future movement of the stock market is considered impossible, performance of KSE 100 has many factors which has contributed to the growth in value. The most positive factor is CPI which was recorded at 6.9 percent year-on-year in November 2012 versus 10.2 percent during the same period last year. In order to stimulate the economy, SBP has reduced the policy rate form 10 percent to 9.5 percent as announced in the latest Monetary Policy report viewed as a positive sign expected to increase advances form banks. Worker remittances have grown consistently. Upto October 2012 during the current fiscal year, remittances were recorded at USD 4,964 Million as compared to USD 4,315 Million during the same period last year. Pakistan is the fifth largest recipient of worker remittances in the world. It is further expected that SBP will slash the policy rate by another 50 bps to 100 bps to help stimulate private sector credit.

 

The trade deficit reduced to USD 8.168 billion from July to November 2012 compared to USD 9.18 billion during the same period last year. Exports increased to USD 10.08 billion upto November 2012 against USD 9.348 billion for the same period a year ago whereas imports have decreased to USD 18.25 billion in the current fiscal year compared to 18.40 billion during the same period last year. Automobile car sales are expected to reach 180,000 through FY13 based on domestic production whereas an estimated 60,000 vehicles will be imported. Cement industry due to reconstruction efforts in Afghanistan and domestically is increasing at a rate of more than 15 percent. With demand oriented economy, the FMCG and Pharmaceutical industry is growing at an exponential rate expected to remain at 20 percent through FY13. In addition, stocks of FMCG and Pharmaceutical industry have registered growth in share value between 20 percent to 300 percent during the CY12 which is a positive sign for investments. With the ongoing gas curtailment by SNGPL due to low pressure at Qadirpur, the fertilizer plant including Engro, DH Fertilizers and Fauji have been affected; however, since fertilizers are in demand throughout the year, there always remains a positive sentiment by the investors on these stocks. The government has urged to convert all existing and new thermal plants to generate electricity through Thar coal.

As bank interest rates are on a decline and the index has shown consistent upward movement through CY12, investors have also pulled part of their investments from banks and have invested in the stock markets directly or through Mutual funds which have driven the index higher. In 2012 to date, 198 million was the average daily turnover in shares compared to 96.91 million as on December 31, 2011. Average value of daily turnover was PKR 3.506 Billion as on December 31, 2012 as compared to PKR 4,714 Billion to date in CY12. Market Capitalization was PKR 2.945 Trillion as on December 31, 2011 as compared to PKR 4.224 Trillion to date in 2012. The top 10 sectors for 2012 were Support Services, cement, Chemicals, Commercial Banks, Oil and Gas, Textiles, FMCG, Electricity, Fertilizers, Power, and Telecommunication.

Stock investments have a return over and above any other investment medium, provided the risk and return tradeoff is carefully analyzed. Sectors which show potential of growth will always be attractive options with upside movement in price of stock. Popular sectors are expected to witness more investments in the coming time. The index is now expected to cross the 17,000 mark, however, the downside risk of the “bubble” being burst will remain through no one can predict if at all, it will happen. There are several mutual funds and Asset Management firms through where investments could be made. With high inflation in the economy, it becomes pivotal that investments are done to hedge against rising prices for a stable income with an aim the annual returns should not be negative. Various investment options would depend on risk and return profile, age, education, experience, savings and retirement goals. Though options are various including stock investments, it is important that individuals could explore other avenues for placement of funds to ensure stability in income. KSE and stock investments provide the best returns if the time horizon is long. Based on the current and past performance of the stock market, stock investments will attract more investments through year 2013.

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