Feb 2010: lacklustre month at the KSE

Feb 2010 turned out to be a lacklustre month for KSE. While volumes remained thin and second tier centric (refer graph alongside), index performance was marred by news of capital gains tax imposition effective July 1^st and resignation of the Finance Minister. The two combined resulted in last week of Feb wiping out MTD gains with KSE-100 index closing +0.4% MoM; rendering it an average performer from a regional perspective. However outperformance vs. peers in Jan means that KSE is the highest gainer YTD amongst peers.

Foreign flows remain muted; MSCI review did not help
Pakistan's attraction in terms of PE discount (44%) remains intact but foreign flows remained muted in Feb. Net inflow of US$16.6mn was marginally higher MoM but note that gross activity (~US$98mn) was 20% lower. While delay in disbursement of committed funds from US and FoDP cast a shadow over currency outlook (-0.5% MoM), sentiments were also dented by MSCI review where Pakistan remains in MSCI FM, without indications of potential upgrade

Corporate results season was largely ignored
Barring a couple of results (Hubco- strong PRs2.50 DPS and NBP expectations build up ahead of 4^th March announcement), corporate results failed to spark excitement. Within our universe, key upside surprises emanated from OGDC (Qadirpur settlement), Hubco (generation bonus), POL (lower tax rate) and PSO (interest income on receivables) while Kapco's results were lower than expected. HBL results, while in line in terms of core profits, surprised the market as Nigeria related losses were adjusted in 2008 financials.

Strategy Perspectives - market looking for triggers
We believe that the market will continue hunting for triggers in March led by 1) any development on margin financing and 2) monetary policy in end March. With inflation expected ~13% for Feb, MPS should be a leading indicator on SBP's view on foreign flows. Other factors shaping KSE could be modalities of capital gains tax and relations between govt and judiciary.

Top picks at the KSE
We maintain our liking for energy stocks PPL, POL, PSO, APL and Hubco where any follow up on govt's commitment in Feb-end to resolve circular debt issue through structural changes and liquidity injection should provide impetus to PSO and Hubco in particular. While fertilizer stocks (FFC, Engro) continue to remain on our preferred list, we believe the incrementally positive news flow on PTCL also warrants attention. In addition, we continue to look for clarity on economic front (flows, commodity price weakness) to turn positive on banks and cements.