Investment Analysis & Portfolio Management– Spring 2013 NUST Business School Assignment-1 Using research regarding the following

topic(s), provide your assessment in the format described below. o o o Pakistan major stock market as indicated by KSE-30 and KSE-100 indices has seen a substantial rise in the past year. Explain the cause(s) of this surge. Specifically address reasons for the influx of new capital versus the underlying performance of the securities. Is this representative of sound financial reforms? Is the impact lasting?

Due Date: This assignment is due at the beginning of class on March 22nd, 2013. Late submissions will be assigned a reduced grade per guidelines in the syllabus. Format: Five (4-6) Pages Maximum All assignments are expected to be professionally written, researched, organized, referenced and compiled, and will be graded accordingly. Follow the APA or Chicago writing formats for proper formatting and citations. Up to SIXdouble spaced pages typed on standard sized paper. Additional information including selfcreated graphs, tables, etc. may also be included as supporting information in appendices as and when needed. Statement of Original Work: A statement identifying the assignment as your original work must accompany on the cover page. Plagiarism Check: A one page copy of the summary statement from Turnitin must be provided with the submission, indicating the factor. Team Submission: Select a group consisting of FIVE students, who will work jointly on this assignment. Each group will submit one assignment. Grading: Assignments will be graded per submission out of a maximum score of 25, and each group member will be assigned the same grade.

000 level.000 people to retaliatory bombings by the Taliban. 11. is importing 2. A boom in agriculture and residential property. at about seven times earnings. and an energy crisis—power outages last as long as 18 hours a day—has led to social unrest. a maker of fertilizer. He notes that earnings growth has kept pace with the market. has expanded his Arif Habib Group into a 13-company business that has invested $2 billion in financial services. His group and a clutch of others have become conglomerates of a kind that went out of fashion in the West but seem suited to the often chaotic conditions in Pakistan. Andrew Brudenell. At the same time. boast strong return on equity levels in the 20% range.500 milk cows from Australia to start a dairy business after running MCB Bank.84% (37% in US dollar terms).000 Pakistanis this year. he adds. have . in the war on terror after Sept. according to Barron's.S.Pakistan's KSE-100 Index Outperforms Asian and BRIC Stock Indices in 2012 Karachi's KSE-100 index surged nearly 50% (37% in US $ terms) in 2012 to top all Asian market indices. and D. The firms. chief executive of Macro Economic Insights. A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank's rate cuts helped the KSE-100 index approach 17. It also easily beat India's Sensex index which was the top performer among BRICs with 25. has lost more than 40. says Sakib Sherani. and pay good dividends.19% annual gain. 31. some 70 million Pakistanis—40 percent of the population—have become middle-class. Pakistan is one of the cheapest markets he follows. a gain of 49. Billionaire Mian Muhammad Mansha. manager of the HSBC Frontier Markets fund (HSFAX) in London. since joining the U.G. Here's an excerpt of a recent Businessweek story titled "Pakistan. Foreign direct investment declined 24 percent to $244 million in the four months ended Oct. cement. fertilizer. has moved into packaged foods and coal mining. one of Pakistan’s richest men. remains bullish on Pakistani equities. In spite of this run-up in KSE-100. Land of Entrepreneurs " which captures the ground reality of Pakistan's business landscape that is masked by the continuing reports of doom and gloom making up the standard mass media narrative about Pakistan: " (Arif) Habib. Political violence in Karachi has killed 2. a research firm in Islamabad. These companies have prospered in a country that. according to the central bank. and steel factories since 2004. who started as a stockbroker more than four decades ago. Engro. are typically cash-rich. It was followed by Bangkok's SET index which advanced 36%. Nishat Mills. Khan Cement. as well as jobs in hot sectors such as telecom and media.

” The KSE100. My hope is that increasing share of the informal economy will become documented with the rising use of technology. up 43 percent in calendar year 2012. “Foreigners don’t come here. has risen elevenfold since mid-2001.helped Pakistanis prosper.” says Azfer Naseem. so the field is wide open. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. “Those who understand the difference between the perception of Pakistan and the reality have made a killing. we have growth of 3 percent. Resolution of capital gains tax (CGT) related issues. “Just go to the malls and see the number of customers who are actually buying in upscale stores and that shows you how robust the demand is. 2012 KARACHI: The Pakistan’s capital market remained one of the best performing markets in Asia in 2012 with the 100-share index gaining 48 percent in terms of local currency and 37 percent in dollar terms in the outgoing calendar year with only nine trading sessions remaining. improved foreign flows in equities. Market capitalisation at $43bn. stocks have been buoyed by corporate earnings. it appears that the country's economy is in fact healthier than what the official figures show. 2012.” Habib says. down 42% from its peak: The Karachi Stock Exchange’s worth is now Rs 4. KSE best performing market in Asia: Pakistan stocks gain 48 percent in 2012 0 0 By Staff Reporter Published: December 18. head of research for Elixir Securities in Karachi. “Despite the energy crisis.2 trillion. rising consumerism. which were bolstered in turn by rising consumer spending.” Sherani of Macro Economic Insights estimates the middle class doubled in size between 2002 and 2012. Over the past decade. in dollar terms the market capitalisation is still down 42 percent from its peak of $75 billion seen in April 18. Topline Sec analyst Mohammad Danish said major boost to Pakistan equities was provided by declining interest rates that sharply came down by 450 basis points (bps) in the last 18 months (250 bps in 2012). Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years." While Pakistan's public finances remain shaky. the benchmark index of the Karachi Exchange. However. It also seems that the national debt is much less of a problem given the debt-to-GDP ratio of just 30% when the informal economy is fully comprehended. Sharp . Shares in the index are up 43 percent this year alone. better corporate earnings and relative calmness on political scenario also supported the share prices.

Market rising. in spite of bull-run the volumes are still lower than average daily of Rs 30 billion witnessed in the period of 2005-07. Growing demand and firm prices. increased regional demand and declining interest rates helped this sector to perform despite lower share in the overall market capitalisation. absence of large listings and decent dividend payouts have restricted the growth in the overall market valuation.5 billion in 2011. which is substantially lower than Rs 4. In the absence of vibrant derivatives market and lack of new listings. improving earnings of listed textile firms on account of stable cotton prices. recently approved EU trade package and strong textile export numbers provided further triggers to the performance. As a result. This low level of listing is seen after a gap of six years while it also compares unfavourably with last 10 years average of 11 offerings a year. In terms of shares.asp?page=2012\12\18\story_18-12-2012_pg5_2 . Similarly.com.dailytimes. the trend of equity public offerings at the market remained depressed. Resultantly. High-Net-worth Individual and local and foreign institutions. kept cement makers’ margin improving. reducing cost pressures due to decline in coal prices and interest rates also helped. volumes have jumped substantially by 121 percent in 2012 to 175 million shares a day mainly due to investors’ interest in low priced shares. not IPOs: Though the stock market has posted a handsome gain in 2012. on account of improved earnings. Further.pk/default. Further. Cement stocks were among the top performers as investors re-rated the sector by 152 percent in 2012. Pakistan’s equity market saw only three initial public offerings in the outgoing calendar year 2012 as compared to four in 2011. textile sector gained 99 percent in 2012.decline in rupee since 2008. Pakistan’s market capitalisation-to-gross domestic product ratio of 20 percent of Pakistan is one of the lowest in the region. Volumes improve by 35%: Average daily traded value remained at Rs 4. During outgoing 2012. Cement and textile remained the best performing sectors: The rally in 2012 was led by secondtier stocks as traditional sectors like exploration and banks did not outperform.8 billion or $56 million offered in 2011. a total of Rs 500 million or $5 million was offered to general public. http://www.7 billion in 2012 as compared to Rs 3. an improvement of 35 percent.

can investors expect the index to breach the 20. 2013 Two main factors are likely to drive growth: a continued resilience in corporate earnings.Where’s the limit?: Will the KSE break the 20.000-point mark in 2013? Most stock market . with the benchmark KSE-100 index rising 49%. and an increasing likelihood of foreign investor attention. LAHORE: After a blow-out year in 2012.000 barrier in 2013? By Our Correspondent Published: January 7.

a technical research analyst at Foundation Securities.analysts are reluctant to say so explicitly. the last year for which complete data is available. For 2013.700 level by the end of calendar year 2013 – though he hastens to add that there is likely to be plenty of volatility in the earlier half of the year. The 20. even a slight increase in revenues is likely to result in a substantial increase in profits for most of these companies. Given the fact that the market’s 10-year average return is 21.3%. Fundamental factors also favour another profitable year for equity market investors. but it is likely to benefit the economy nonetheless. the outlook for key sectors appears strong. and an increasing likelihood of foreign investor attention. according to BMA Capital. . But it is not just the technical factors that favour a continued rise in the equity markets. get close. net incomes for all companies listed on the Karachi Stock Exchange increased by 27. Given high levels of operational leverage. The devaluation of the rupee is likely to help revenue growth at companies in the energy sector as well as textile exporters. when the index may actually slide back to the 15. In 2011. the KSE100 index would only need to have a below average year in order to breach that important psychological barrier. judging by preliminary data. at least. according to data released by the State Bank of Pakistan.000-point barrier may sound dizzyingly high. but it is only about 18. particularly from foreign investors. This growth may be cyclical. Another factor at play is election spending. who predicts that the stock market may hit the 19. Two main factors are likely to drive growth: a continued resilience in corporate earnings. which is likely to drive growth in cement sector stocks as the government spends more money on infrastructure projects in the run-up to the polls. One of the more optimistic forecasts is by Syed Rehan Ali.2%.700 level. Corporate earnings have grown remarkably strongly over the past couple of years. an investment bank.3% higher than the closing level of 2012. Secular factors – such as the rising purchasing power of the middle class – are also at play and are likely to cause a renewed interest in food and consumer goods companies. though their forecasts suggest that the market may. The corresponding figure for 2012 is likely to be in a similar range.

2013. even to foreign investors who have hitherto remained skittish.2 times expected 2013 earnings. That increased demand. is likely to turn into a selffulfilling prophecy of higher returns. which is looking to de-list from the Karachi Stock Exchange. which means that valuations for Pakistani stocks are likely to rise. Impact of Pak-US Relationship News on KSE-100 Index .Another factor at play in this sector is likely to be the more than $335 million that investors will be looking to redeploy in the food and consumer goods sector after they receive their payouts from Unilever Pakistan. who have struggled for returns in both their own home markets as well as more established emerging markets. in turn. Add in an expected dividend yield of 7. According to Raza Jafri. And then there is the expected interest from foreign investors. the Pakistani equity market is currently trading at 7. reporting by Farooq Tirmizi Published in The Express Tribune. This is not only below regional markets but also below even Pakistan’s own historical levels. January 7th. a research analyst at AKD Securities. at least some of them are likely to turn their attention towards frontier economies like Pakistan.6% and Pakistani stocks will suddenly start to look very attractive indeed. In 2013.

html Foreign investors driving KSE towards 18. . The other important question that people are eager to know is which stocks foreigners prefer.000 mark in the run up to general elections by May 2013 thereby has the potential to provide 15 percent gains. foreigners own US$3.2bn worth of Pakistani shares (excluding foreign sponsors holding). Although the number is lower than the peak levels of US$5. And thanks to net foreign buying. Many investors are now curious to know the future direction of market beyond 18. cheap valuations and vibrant rural/informal economy are key factors attracting foreign fund managers towards Pakistan. according to SBP data. The foreigners’ holding of shares at KSE is one of its high level in spite of security issues. The index has now reached close to 18.000 benchmark Visits 82 By Yasir Ameen February 22. Currently.1bn in April 2008 but at that time foreigners’ holding was 24% of the free float.000 level. The capitalization of Pakistan market has now reached US$44.http://southasiainvestor. Besides normal inflow of funds to Emerging and Frontier markets.com/2012/12/pakistans-shares-index-outperforms.blogspot. 2013 Foreign shareholding in Pakistan stocks is rising significantly at the Karachi Stock Exchange by 30 percent of overall market value driving the benchmark 100-index towards 18.8bn of which free float is US$11bn.000 mark but two months ahead of what has been predicted but it can reach 18.000 mark in light of worsening security conditions and upcoming transfer of power at the domestic political scene. weak macro economy and declining local currency.

This was stated by Arif Habib. News flow is that the government and opposition parties are in consultation and may announce a consensus candidate in next few weeks. economy and stock market that assembly completes its tenure. Arif Habib said the economy has been strengthened in real sectors in the period of present government compared with its previous government mainly in tackling challenging issues such as high oil prices and inflation. he said. adding it is good for the country. he said. The slight uncertainty among investors is timely transition of power which will direct equity market towards the significant growth in investment and indices positions. he added. Stock Analyst Sohail Ahmed said. Arif Habib is optimistic about the recording-making journey of the equity market as he believed that market will see growth in capitalization and trading volume in months to come. 2013. he said. The economic agenda of all political parties are more or less same including sustainability of macroeconomic indicators and resolution of energy crisis. Hence the stock will perform positively whatever political party comes in the power for next five years. a stock market legend said. then the foreign flows will remain decent. Anytime before March 16. . The love for emerging and frontier markets along with pre-election buying by foreigners will be important determinant of market direction in coming few months. he opined. Chairman and Chief Executive of Arif Habib Group while talking to Weekly Pulse. In case the elections are held on time as per the constitution and there is no major disruption towards the political transition. a new caretaker government has to take charge so that they can hold elections independently. KSE is marching towards sustainable growth due to positive developments on the country’s political scenario particularly for setting up of interim government and subsequent holding of general election in the country. Even the stock market performs bullish in the period when the interim government assumes the power for certain days and it will do much better after the election of the new government.The foreigners have bought shares worth US$117mn and sold US$89mn at Karachi bourse in 6 weeks of 2013 so far resulting in net buying of US$28mn. The sentiments in investors are positive and strong but all these are linked to the timely transition of the caretaker government and its assurance of organizing general polls on time. The investment in various sectors is seemingly difficult due to high cost setting up business hence the existing companies will remain attractive in the eyes of investors for next few years. The stock market remains its positive growth in long-run without any external influence because the corporate profitability is tremendous in various scrips with constant honoring in the values of shares.

otherwise some correction expected. these names will be referred to the ECP (Election Commission of Pakistan). committee will decide on a name and if the committee is unable to decide. PM and opposition parties will nominate 2 persons each to a parliamentary committee which is constituted within 3 days of the dissolution of National Assembly. it is expected the market to continue to perform well. Leading stock brokers and analysts said. Caretaker Prime Minister is to be appointed by the President in consultation with the PM and the opposition leader in the outgoing assemblies. In case the transfer of power. In next 3 days. which will make the final decision within the next two days. .According to the constitution. In case of disagreement. that is selection of caretaker PM is through consensus and there is no uncertainty.

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