Market Outlook

Week In review

It was an eventful week, and that it itself is an understatement of epic proportions. While the debate with
regards to NRO dominated the headlines the business community seemed perplexed and hesitant.
Monetary policy announcement highlighted central bank’ cautious stance as the matrix of inflation looks
unclear in the coming days. Under macroeconomic stabilization program the major indicators have
revealed improvement; inflation reduced to single digits, decline in current account deficit and
improvement in Large Scale Manufacturing allowed SBP to trim down the discount rate by 50BPS to
12.5%.Experts argue that a single digit CPI doesn’t necessarily depict the accurate image of price
fluctuations; on the contrary it is the huge base effect which is perhaps coming into play. Industry was
quietly expecting a bigger rate cut as many believed that it was the best opportunity to extend some relief
to the private sector making debt servicing a little easier not to mention securing additional credit.
Government borrowing is essentially inflationary in nature that is another reason why rates are well above
double digits. Just Two Days after this announcement NEPRA raised the power distribution companies
tariff from 53 paisas to 1.45 RS per unit; painting a not so pretty picture of things to come. Some analysts
still believe that a Rate Cut of 100-150 basis points is on the cards in the next policy announcement, the
numerical evidence however suggests otherwise.

Thin volumes and Low trading range were the key words to underline the market movement this week,
rate cut was already priced in, Law and order situation, political uncertainty, Temporary shift of attention
due to Eid and absence of a leverage product resulted in a significant drop in trading volumes.
Nonetheless Day trading activities looked dominant as accumulation in low price and high yielding stocks
continued. Going forward there are concerns with regards to the profitability of many sectors. Cement
sector would be a little vulnerable as construction activities are emaciated in winters, already sector has
underperformed the market by 34% from August 17, 2009 and a potential slash in PSDP would not
contribute positively. Rising level of Non Performing loans is an earning dampener for Banks and a mere
12% increase in profitability is expected. Higher level interest rate has resulted in unprecedented increase
in the Non Performing Loans forcing the industry to adopt a more cautious approach when it comes to
granting credit to private sector. With the same token Oil Sector is being hampered by Sky rocketing
Circular Debt, an immediate solution is somewhat obligatory but seems unlikely. Fertilizer on the other
hand demonstrated better sales numbers, ensuring steady earnings.

The Federal Reserve Bank is of view that the recent decline in dollar rate is” Orderly”; the comment
sparked renewed selling pressure on greenback as it fell to a 14 years low against Yen on Thursday. US
dollar made a low of 85.59 Yen in Asian trade signaling a further fall. However the dollar index took an
upside turn which is a possible indication of a technical Rebound, Weak Dollar is forcing central banks
and investors to diversify their holding into the classical hedge Called Gold. Precious metal is constantly
making news highs and is tipped to go to the level of 1300$ per ounce. Local market is reflecting the
recent price hike and per tola price of Gold is around 38000 Rupees now.

Looking ahead receivables from IMF and FoDP coupled with foreign Remittances might ease liquidity
pressures but the inflation would remain a massive challenge, Hike in Electricity tariff and a probable
increase in oil price can reverse the current trend. So if you are in the market observe caution or
remember the word “catastrophe” (French for disaster in case you are wondering). Until next time Avoir!

Anis Shiekh

anis.shiekh@dunyatv.tv