Although the Federal Budget FY14 has failed to provide any concrete measures for addressing the structural fiscal imbalances plaguing this economy; it appears investors at local bourses didn receive the memo.
The immediate reaction from business stakeholders is that the new budget will raise general price levels and add to the cost of doing business because of reliance on higher sales tax, turnover tax and withholding agents. Yet the KSE 100-index surged by another 433 points to reach 22,757 points, on the first trading session following the budget announcement.
In essence, the current bull-run began in the days immediately preceding the General Elections 2013. The PML-Ns victory at the polls drove positivity at the bourses, as investors expected pro-business measures from the incoming government.
"Investors have historically reacted positively to the PML-N assuming power in the country", former Chairman NIT Tariq Iqbal Khan told BR Research, drawing attention to the higher propensity among firms to enlist on local stock exchanges during previous PML-N tenures.
He also drew attention to the governments promise of eliminating the outstanding stock of circular debt, saying that "more than the corporate tax rate reduction, sentiments are positive on the promise of a quick resolution to the circular debt which will in turn bring more electricity to the national grid."
While the former NIT chairman expects the inflationary pressures to rein in positivity down the road, other market veterans are more pointed in their criticism. Pointing out that "current price to earnings ratios are already at the upper end of historic norms," executive vice chairman Arif Habib Limited, Nasim Beg told BR Research, "I don see why the euphoria should continue."
Sales on finished consumer goods will now be higher, textiles manufacturers will charge advance tax on sales to wholesalers, dealers and retailers; minimum tax will be payable on construction projects and adjustable withholding and higher registration tax will be charged on motor vehicles. Besides, "transactions of margin financing, trading financing and lending shall be subject to withholding tax @ 10 percent" highlighted a post-budget assessment by Optimus Capital Management.
Hopes and aspirations from the pro-business government are seemingly so high that none of these developments dampened sentiments at local bourses on the first day of trade following the budget speech. But hope will not lay the eggs and hatch them too. History shows that unabated bull-runs at the KSE, like that witnessed in early 2005 are often followed by free-falls. If investors don curb their enthusiasm soon, they may be in for a rude awakening.
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