KSE: Getting high on foreign buying

Having successfully maintained its presence above 11,000 levels, the KSE bulls seemed to have slaughtered the bears. The benchmark KSE ended at 11,620 points - its highest since mid-July 2008 - with average volumes ticking up 21 percent to 182 million last week.
Talks abound, both in trading rooms and research wings, that the KSE-100 would now breach the 12,000 point barrier.
"KSE can touch 13,500 points, sans re-rating, in CY11", KASBs reported titled "2011 year ahead - A broader rally in store?" shouted last week. The report added that macroeconomic improvements, reintroduction of leverage and the spreading of the rally to other stocks in addition to OGDC could even push the index to 14,300 points.
Suddenly, there is a renewed sense of euphoria in the market - one that is affirmed by the indexs strong technical consolidation between 9,500 and 10,500 points seen in the yester months.
Yes, there are threats of weak LSM growth, especially after the latest twist in auto policy and the likely bottoming out of the house rent component of the CPI basket that is seen keeping construction activities rather lacklustre.
And yes, the negative downgrade of banks by Moodys will likely offset any positive interest in MCB and UBL possibly stemming from reports that Mian Mansha is eyeing a stake in the latter. But given foreign interest in Pakistani stocks, their persisting discounting of macroeconomic challenges faced by the country, the KSE-100 looks set to rise.
"Banks rating downgrade is going to have a negative impact in the near to short term, but eventually, thanks to liquidity in global markets, buying should resume," Khalid Iqbal, Director Invest & Finance Securities told BR Research.
Still, there are some serious threats that loom large. "If the RGST is not implemented, the IMF will delay its tranche further, which in turn can also act as a stumbling block for other bilateral aid and debt inflows," says Iqbal.
RGST has lately become the hottest battleground for Pakistani politicians. The PPP may have highest number of seats in the parliament and the opposition may have walked out of voting, following a give and take, in previous instances. But this time it might be different.
The countrys major opposition parties have expressed their views too loud and too clear - backing out from which could be political suicide, inviting severe backlash from the businessmen and the masses alike.
On the contrary, failure to implement RGST will not only halt the IMF and other bilateral flows, but also result in further government borrowing - leading to further tightening of the monetary policy.
Broadly speaking, therefore, the KSE bulls have three major cards in their hands: banks, oil, and foreign inflows.
Taking exposure in banks these days is essentially taking exposure on the government, given the governments heavy borrowing from the banks. This is a rather risky proposition - as pointed out by Moodys last week - whose susceptibility will increase if and when the failure to RGST materialises.
As for the worthiness of the government, the facts speak for themselves: the governments commodity operations are reportedly financed in the range of 15.3-15.8 percent, whereas Engro, a corporate, is borrowing at 14.5 percent through Rupiya.
The second, and more important driver, is oil prices, which itself is a double-edged sword. If oil prices continue to soar, the KSE-100 will rise given the heavy weighted oil stocks. Yet if it remains uppish, the economy would take a hit.
Therefore all eyes are on KSEs biggest driver, the foreign investors. And since there are no signs of foreign inflows tapering off in the immediate future, enjoy the KSE high while it lasts. But be wary, for it may leave a bad hangover.

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MAJOR INVESTMENT INFLOW/OUTFLOW

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$(mn)            Last    Month       FY

                 week  to-date  to-date

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FIPI             11.9     32.6    209.6

LIPI

Companies         7.3      0.3     33.6

Mutual funds     0.04      0.5     45.7

Banks            12.0     18.0     40.0

Individuals       1.3      4.4     42.0

NBFC              5.4      8.5     24.9

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Source: NCCPL

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