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Pakistan monthly snapshot

Wrath of May strikes again- KSE down 10.6% MoM
Average KSE-100 index monthly return since 1997 depict May as the worst performing month at KSE. May 2010 was no different as KSE was the worst performing market in the region and the index posted its largest single month decline (-10.6%) since Dec-08 (floor removal) with 45% MoM decline in volumes to US$41mn/day. Catalysts for the decline were 1) regional pressures fuelling threat of FII outflows (interestingly FII was +US$26mn for May; details are not available to concretely decipher divergent trends within stocks); 2) uncertainties related to upcoming budget and 3) speculation over redemption pressures in local funds. 

Macros- budget expectations/targets lead the news flow
Despite SBP announcing its monetary policy (status quo for now) and release of US$944mn from the US under Coalition Support Fund, macro news flow was muted by Federal Budget expected on 5th June. With IMF firm on tax reforms and fiscal pressures mounting, populist moves are likely to be scant, barring a couple of token announcements and focus will be on raising federal tax/GDP ratio from current 9.2%. The make or break for KSE however would be capital gains tax, in our view.

Strategy perspectives – valuations could come into play
Looking ahead, we expect near term market direction to remain linked to budget and modalities of new measures like Capital Gains Tax, Value Added Tax and Single Treasury Account. However, valuations could also come into play going forward. While KSE is down ~10% in May, pertinent to note that OGDC and PPL (index heavyweights) have outperformed, implying double digit decline in other blue chips, which could interest value hunters in case of further decline. We would closely track Engro (-12%); PSO (-19%), Lucky (-17%) and UBL (-17%).

M&A in the news – some opportunistic; some forced
Another interesting theme during May was relatively frequent news bites on M&A activity, with reasons underpinning potential deals being a mixture of opportunistic and forced. Key news flow included: 1) Faysal Bank’s intentions to acquire RBS Pakistan; 2) Azgard Nine’s plans to divest holding in fertilizer subsidiary Agritech; 3) PSO’s backward integration into refining via acquisition of Pak Refinery and 4) Etisalat’s desire to raise stake in Pak Telecom by a further 25% from current 26%.

Law & order; geopolitics: back in the limelight
With the responsibility of a terrorist attack on a minority worship place in Lahore being claimed by Southern Punjab wing of Taliban, talks of a possible operation in South Punjab have started to emerge. Combined with growing US pressure to conduct operations in North Waziristan and news reports that US is also planning uni-lateral strikes in Pakistan, geo politics and law and order are back in the news following a relative lull of late, which could concern investors.

KASB Securities and Economics Research

1 June 2010

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