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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.

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. It was followed by Bangkok's SET index which advanced 36%. It also easily beat India's Sensex index which was the top performer among BRICs with 25.19% annual gain.

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 17,000 level, a gain of 49.84% (37% in US dollar terms). In spite of this run-up in KSE-100, Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, remains bullish on Pakistani equities, according to Barron's. Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. Here's an excerpt of a recent Businessweek story titled "Pakistan, 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, who started as a stockbroker more than four decades ago, has expanded his Arif Habib Group into a 13-company business that has invested $2 billion in financial services, cement, fertilizer, and steel factories since 2004. 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. Engro, a maker of fertilizer, has moved into packaged foods and coal mining. Billionaire Mian Muhammad Mansha, one of Pakistan’s richest men, is importing 2,500 milk cows from Australia to start a dairy business after running MCB Bank, Nishat Mills, and D.G. Khan Cement. These companies have prospered in a country that, since joining the U.S. in the war on terror after Sept. 11, has lost more than 40,000 people to retaliatory bombings by the Taliban. Political violence in Karachi has killed 2,000 Pakistanis this year, and an energy crisis—power outages last as long as 18 hours a day—has led to social unrest. Foreign direct investment declined 24 percent to $244 million in the four months ended Oct. 31, according to the central bank. At the same time, some 70 million Pakistanis—40 percent of the population—have become middle-class, says Sakib Sherani, chief executive of Macro Economic Insights, a research firm in Islamabad. A boom in agriculture and residential property, as well as jobs in hot sectors such as telecom and media, have

helped Pakistanis prosper. “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,” says Azfer Naseem, head of research for Elixir Securities in Karachi. “Despite the energy crisis, we have growth of 3 percent.” Sherani of Macro Economic Insights estimates the middle class doubled in size between 2002 and 2012. “Those who understand the difference between the perception of Pakistan and the reality have made a killing,” Habib says. “Foreigners don’t come here, so the field is wide open.” The KSE100, the benchmark index of the Karachi Exchange, has risen elevenfold since mid-2001. Shares in the index are up 43 percent this year alone. Over the past decade, stocks have been buoyed by corporate earnings, which were bolstered in turn by rising consumer spending." While Pakistan's public finances remain shaky, it appears that the country's economy is in fact healthier than what the official figures show. 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. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. My hope is that increasing share of the informal economy will become documented with the rising use of technology. Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years.

KSE best performing market in Asia: Pakistan stocks gain 48 percent in 2012
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By Staff Reporter Published: December 18, 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. 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). Resolution of capital gains tax (CGT) related issues, improved foreign flows in equities, rising consumerism, better corporate earnings and relative calmness on political scenario also supported the share prices. Market capitalisation at $43bn, down 42% from its peak: The Karachi Stock Exchange’s worth is now Rs 4.2 trillion, up 43 percent in calendar year 2012. However, in dollar terms the market capitalisation is still down 42 percent from its peak of $75 billion seen in April 18, 2012. Sharp

decline in rupee since 2008, absence of large listings and decent dividend payouts have restricted the growth in the overall market valuation. As a result, 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 4.7 billion in 2012 as compared to Rs 3.5 billion in 2011, an improvement of 35 percent. In terms of shares, volumes have jumped substantially by 121 percent in 2012 to 175 million shares a day mainly due to investors’ interest in low priced shares. In the absence of vibrant derivatives market and lack of new listings, in spite of bull-run the volumes are still lower than average daily of Rs 30 billion witnessed in the period of 2005-07. Market rising, not IPOs: Though the stock market has posted a handsome gain in 2012, the trend of equity public offerings at the market remained depressed. Pakistan’s equity market saw only three initial public offerings in the outgoing calendar year 2012 as compared to four in 2011. 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. During outgoing 2012, a total of Rs 500 million or $5 million was offered to general public, High-Net-worth Individual and local and foreign institutions, which is substantially lower than Rs 4.8 billion or $56 million offered in 2011. 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. Cement stocks were among the top performers as investors re-rated the sector by 152 percent in 2012, on account of improved earnings. Growing demand and firm prices, kept cement makers’ margin improving. Further, reducing cost pressures due to decline in coal prices and interest rates also helped. Similarly, improving earnings of listed textile firms on account of stable cotton prices, increased regional demand and declining interest rates helped this sector to perform despite lower share in the overall market capitalisation. Further, recently approved EU trade package and strong textile export numbers provided further triggers to the performance. Resultantly, textile sector gained 99 percent in 2012.

http://www.dailytimes.com.pk/default.asp?page=2012\12\18\story_18-12-2012_pg5_2

Where’s the limit?: Will the KSE break the 20,000 barrier in 2013?
By Our Correspondent Published: January 7, 2013

Two main factors are likely to drive growth: a continued resilience in corporate earnings, and an increasing likelihood of foreign investor attention.
LAHORE:

After a blow-out year in 2012, with the benchmark KSE-100 index rising 49%, can investors expect the index to breach the 20,000-point mark in 2013? Most stock market

analysts are reluctant to say so explicitly, though their forecasts suggest that the market may, at least, get close. One of the more optimistic forecasts is by Syed Rehan Ali, a technical research analyst at Foundation Securities, who predicts that the stock market may hit the 19,700 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, when the index may actually slide back to the 15,700 level. The 20,000-point barrier may sound dizzyingly high, but it is only about 18.3% higher than the closing level of 2012. Given the fact that the market’s 10-year average return is 21.2%, the KSE100 index would only need to have a below average year in order to breach that important psychological barrier.

But it is not just the technical factors that favour a continued rise in the equity markets. Fundamental factors also favour another profitable year for equity market investors. Two main factors are likely to drive growth: a continued resilience in corporate earnings, and an increasing likelihood of foreign investor attention. Corporate earnings have grown remarkably strongly over the past couple of years. In 2011, the last year for which complete data is available, net incomes for all companies listed on the Karachi Stock Exchange increased by 27.3%, according to data released by the State Bank of Pakistan. The corresponding figure for 2012 is likely to be in a similar range, judging by preliminary data. For 2013, the outlook for key sectors appears strong. The devaluation of the rupee is likely to help revenue growth at companies in the energy sector as well as textile exporters, according to BMA Capital, an investment bank. Given high levels of operational leverage, even a slight increase in revenues is likely to result in a substantial increase in profits for most of these companies. Another factor at play is election spending, 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. This growth may be cyclical, but it is likely to benefit the economy nonetheless. 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, particularly from foreign investors.

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, which is looking to de-list from the Karachi Stock Exchange. And then there is the expected interest from foreign investors, who have struggled for returns in both their own home markets as well as more established emerging markets. In 2013, at least some of them are likely to turn their attention towards frontier economies like Pakistan, which means that valuations for Pakistani stocks are likely to rise. According to Raza Jafri, a research analyst at AKD Securities, the Pakistani equity market is currently trading at 7.2 times expected 2013 earnings. This is not only below regional markets but also below even Pakistan’s own historical levels. Add in an expected dividend yield of 7.6% and Pakistani stocks will suddenly start to look very attractive indeed, even to foreign investors who have hitherto remained skittish. That increased demand, in turn, is likely to turn into a selffulfilling prophecy of higher returns. reporting by Farooq Tirmizi Published in The Express Tribune, January 7th, 2013.

Impact of Pak-US Relationship News on KSE-100 Index

http://southasiainvestor.blogspot.com/2012/12/pakistans-shares-index-outperforms.html Foreign investors driving KSE towards 18,000 benchmark Visits 82 By Yasir Ameen February 22, 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 18,000 level. The index has now reached close to 18,000 mark but two months ahead of what has been predicted but it can reach 18,000 mark in the run up to general elections by May 2013 thereby has the potential to provide 15 percent gains. Many investors are now curious to know the future direction of market beyond 18,000 mark in light of worsening security conditions and upcoming transfer of power at the domestic political scene. The foreigners’ holding of shares at KSE is one of its high level in spite of security issues, weak macro economy and declining local currency. Besides normal inflow of funds to Emerging and Frontier markets, cheap valuations and vibrant rural/informal economy are key factors attracting foreign fund managers towards Pakistan. The other important question that people are eager to know is which stocks foreigners prefer. The capitalization of Pakistan market has now reached US$44.8bn of which free float is US$11bn. And thanks to net foreign buying. Currently, foreigners own US$3.2bn worth of Pakistani shares (excluding foreign sponsors holding), according to SBP data. Although the number is lower than the peak levels of US$5.1bn in April 2008 but at that time foreigners’ holding was 24% of the free float.

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 love for emerging and frontier markets along with pre-election buying by foreigners will be important determinant of market direction in coming few months, Stock Analyst Sohail Ahmed said. In case the elections are held on time as per the constitution and there is no major disruption towards the political transition, then the foreign flows will remain decent, he added. 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. This was stated by Arif Habib, Chairman and Chief Executive of Arif Habib Group while talking to Weekly Pulse. 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, he 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. 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 said. 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 economic agenda of all political parties are more or less same including sustainability of macroeconomic indicators and resolution of energy crisis, he opined. Hence the stock will perform positively whatever political party comes in the power for next five years, adding it is good for the country, 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. 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, he said. 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, a stock market legend said. Anytime before March 16, 2013, a new caretaker government has to take charge so that they can hold elections independently. News flow is that the government and opposition parties are in consultation and may announce a consensus candidate in next few weeks.

According to the constitution, 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 of disagreement, 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. In next 3 days, committee will decide on a name and if the committee is unable to decide, these names will be referred to the ECP (Election Commission of Pakistan), which will make the final decision within the next two days. In case the transfer of power, that is selection of caretaker PM is through consensus and there is no uncertainty, it is expected the market to continue to perform well, otherwise some correction expected, Leading stock brokers and analysts said.

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