Pakistan Market Strategy - Pakistan Strategy Report 2010...

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Completed on Nov 25, 2010 – Distributed on Nov 26, 2010 JS Research is available on Bloomberg, Thomson Reuters and CapitalIQ All prices are as of Nov 24, 2010 Please refer to the important Disclaimer on the last page “One should not overstate Pakistan’s resilience. The world is rightly alarmed at the mayhem that rages at its centre. But, if you care to look on the bright side, you might conclude that, if Pakistan can survive a year like this, it can survive anything” - David Pilling in 20th Oct 2010’s edition of FT. Macro: The country that refuses to be down and out The level of resilience of the country is also acknowledged by international rating agencies, as both Moody’s and S&P affirmed Pakistan’s ratings to be the same as prior to summers flood levels. It is true, that 2010 never proved to be easy for policy makers in deciding the response to such shocks, as in addition to man- made calamities, Pakistan, has encountered the deadliest floods that the world has seen leading to over US$10bn in estimated losses, at least 20mn from the population affected, and consequently raising the need to pay US$1.8bn or 1 percent of GDP in cash to flood victims. The economic as well as social pain is reflected from the expected higher fiscal deficit, reduced national output and the resultant higher price levels. The policy response to the calamity has so far been mixed owing to a stressful financial position. The government has already slashed the development budget by half to route the money to flood victims, the SBP has twice raised the policy rate to encounter inflationary expectations and the government has announced its intent to impose flood surcharge and RGST to enhance the tax base and contain the fiscal deficit. Politics: Order en route to being restored In our view, difference of opinion on political reforms ranging from the 18th amendment, the judges’ appointment, to doing away with the NRO were key factors behind uncertainty in politics during 2010. After consensus on the commissioning of the NFC awards, came the passage of the much awaited 18th amendment. The Parliament remained sovereign, which is reflective from the government’s lack of enthusiasm at having to get the NRO approved by the former. Interestingly, checks and balances are finally effective in the country and both the Judiciary and media are getting due credit for their roles. On the flip side, the country and law makers are still struggling to deal with corruption & terrorism and the failure to tax the rich till date. Market: Pricing in liquidity, strong earnings & cheap multiples In 2010, the market posted a lower than historical return of 18.8%YTD. Although, corporate earnings recovery and inflow of foreign liquidity provided a decent start to the year, the Greece debt crisis, implementation of the CGT and later the tragic floods eroded the market gains. Looking ahead, we have a positive view for the market, on the back of stronger foreign inflows, successful completion of the IMF program, strong FY11 earnings growth (21%) and post flood reconstruction activities. From the valuation perspective, the KSE 100 is still trading at a deep
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This note was uploaded on 01/26/2012 for the course FINANCE 205 taught by Professor Akramzahid during the Spring '10 term at Karachi Institute of Economics & Technology.

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Pakistan Market Strategy - Pakistan Strategy Report 2010...

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