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Stocks more attractive for investment than securities, money market

KARACHI (February 17 2003) : The dividend yields are still attractive as compared with rates offered at the fixed income securities or money market, and the KSE-100 could range between 2100 and 3250 during the current year (2003), representing a 35 percent swing in index where the second half is likely to be stronger.

According to a report of BMA Capital Management, positive view on equities for 2003 is based on the following contentions:

Much of the story of increased capital inflows, reduced fixed income yields and positive political environment has been discounted by the sharp run up in equity values.

However, due to continuation of factors that helped the stock market outperform, we are likely to see a continuation of current equity values with short-term adjustments due to significant liquidity swings moving in and out of the stock market;

Even now, there are limited avenues of investment and low yields in fixed income markets. This will encourage long-term investors to enter the stock market and therefore in the event of a large correction the market will become extremely attractive for investment.

Interest rates are expected to continue downward movement, driven by increased capital inflows.

This again will keep the current levels of equity values sustainable in the absence of any major new equity issues in the market.

Foreign funds are unlikely to enter the market, despite a stable environment. Allocation of these funds generally takes place at the beginning of the year. Despite a good equity story for Pakistan, any foreign interest is only likely to materialise in the event of a major market correction.

Attractive valuations of the stocks with current PE multiples of 7.9x and forecasted PE of 6.8x 2003 earnings is likely to keep investor interest alive in equities.

The unfolding of the earning season and expectations of good corporate announcements, particularly by oil and gas and financial institutions, will keep investors locked into holdings in these sectors and keep the downside movement limited during Q1 2003.

Relatively stable political environment with the formation of a coalition government is likely to drive positive sentiment.

Any expectation of a major push by the Government on investment spending will spur new inflows into the stock market. An economic recovery, which suggests that industrial performance will benefit from low interest rate environment.

At the current KSE 100 levels of over 2500, there are some clear risk factors that may exert downward pressure and may lead to some correction in the index. These include: Any build-up of tensions between India and Pakistan over Kashmir issue is likely to exert a downward pressure on the index.

The expectation of a war in Iraq is likely to keep investor sentiment cautious on the buy side. Any military engagement is likely to trigger fears of a wider Middle East conflict.

Under such circumstances, the KSE 100 could see a 300-point correction in a short span of time.

The only sector, which could act as a hedge to an Iraq conflict is the oil and gas sector and this may outperform on the upside after the correction.

Medium term perspective: The low interest rate environment may divert funds to other avenues of investment especially real estate and consumer durables. This may divert investment holdings for retail investors in particular and reduce exposure in stocks.

The escalation of oil prices in recent months along with any further increases is likely to add to inflationary trends and cost of production for the industry.

Based on technical analysis, we forecast the KSE 100 index to range between 3250 and 2100.

The KSE-100 Index closed at 2546 on Jan 31, 2003, after touching a high of 2955.52 on Jan 16, 2003. From a technical perspective, 2546 is an important support level for the market to continue its bullish trend.

If the Index drifts further lower, this will end the bullish trend of the market, which commenced in August 2002. Given such a move, the Index can then move south to test 2100.

The 2100 level would be the support of the KSE 100 long-term trend line. From a technical perspective, we recommend to sell if the Index closes below 2546.

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