Monetary Policy: Discount rate will be held Constant

Monetary Policy is to be announced on 30th July by State Bank of Pakistan (SBP). It should be remembred that SBP now announced Monetary Policy after every two months.

As we all know current discount rate (federal funds rate in USA) is 12.5% and the consensus among analysts is that it will again be unchanged for two more months.

It is important to note that discount rate is still on a higher side but SBP is cautious to bring it down because of concern of Inflation.

There is no impact of this upcoming Monetary Policy on Stock Market because the outcome of the same is already discounted and expected in the Market.

Rupee Depreciation: Should not be a Cause of Concern for Foreign Investors

Depreciation of Pak Rupee is one of the most important risk factor that Foreign Investors analyze. However because of the fact that Pakistan economy is certainly improving Currency Risk is not a significant concern for Foreign Investors.

Currently the exchange rate is 85Rs/$. The consensus among analysts by keeping in view the Inflation, Interest rates and macro economic situation is that Rupee will depreciate by 5%-6% annually, and the chances of unexpected high depreciation in Rupee is very minor. So, the conclusion is Foregin Investors shouldn't hesitate to invest in Stock Market.

LOTPTA and ICI: Seems to be Good Investment

LOTPTA and ICI Pakistan are also at very attractive levels and seems to be Good Investment for future.

Company Name: LOTTE Pakistan (LOTPTA)
Industry: Petro Chemicals
Current Price: 8.37
Target Price: 12
Expected Return: 43%

Company Name: ICI
Industry: Chemicals
Current Price: 118.60
Target Price: 140
Expected Return: 18%

Disclosure: The information described here is taken from the general Analyst expectations as they expressed it in TV Channels and websites. I don't follow both of these stocks. I may have holding of these stocks. Infact mostly I recommend only those shares that I personally purchased.

Exports At All Times High

Pakistan's Exports recorded an all time high in dollar terms for the fiscal year 2010. Exports in 2010 were 19.38 billion. Data with comparison to last year is as follows:
2009
Exports 17.7
Imports 34
Trade Deficit 17
2010
Exports 19.38
Imports 34
Trade Deficit 15

As we can see Trade Deficit has been reduced by almost 12%. This is a very good news and shows that macro economic situation is improving.
For foreign investors this is a very important news because that means Pakistan's Currency doens't not poses any significant risk for investment.

IMPORTANT INVESTMENT TECHNIQUE FOR PAK STOCK MARKET

Before discussing the investment technique, let me inform you that KSE 100 is having a bull run and this week it closed at almost 10,000. All of the shares that I recommended are going very well, especially POL which has gone to 222. As I have already told you market is still well below its upper limit of 12,000, therefore those investors who haven’t taken the positions can still enter in the market and make profits, so good luck with that. Now we discuss an important investment technique that will help you in getting decent return from KSE 100.

As we all know one thing that is always found in emerging stock markets is “Volatility”. Same is the case with Pakistani stock market. So how can we deal with it? The only way you can deal with this is to book your profits, i.e. sell your shares whenever they appreciate even if you have hold them for a medium to long term perspective. This is how you can increase your return. Don’t sell your entire position but just part of your position. This can be explained easily by two simple examples. (Note: Keep in mind, this strategy should be worked with main stocks i.e. Blue Chip Stocks in our language, all the shares that I recommended are blue chip stocks except PACE Pakistan).

Example 1: When you don’t book the part of your profit.
You bought 100 shares of POL at 200 with the target price of 250.

Investment = 20,000
Expected Return = 25%

If you purchase shares for Rs, 20,000 and when shares reach it’s target price after one year you sell it off and get 25,000. This is equivalent to 25% return.

Initial Investment = 20,000
Final Outcome as cash = 25,000
Gain = 5,000
Return = 25%

Example 2: When you book part of your profit.

Investment = 20,000

Now suppose after 3 months, one share of POL is at 225. You sell 25 shares at this price. So your inflow is 5,625.

Value of your investment after 3 months = (225*75) +5,625 = 22,500.

So now after three months you have 5,625 at your hand as cash and you have 75 shares of POL invested in your portfolio. Now suppose b/c of some political noise or b/c of some general profit taking (like you, many investors will sell their shares and book profit and this can push market downward) market has gone down and share of POL is now trading at 210. Now is the time for you to get the shares again. You have 5,625 in hand so you can buy 5,625/210 = 27 shares of POL (earlier you sold 25 shares but now you have bought 27, i.e. 2 more shares and now you have 75+27 = 102 shares). Suppose 9 more months have passed at now share of POL is of 250 that is, it has reached its target price. So now you sell your entire position. You will get back 102*250 = 25,500.

Initial Investment = 20,000
Final Outcome as Cash = 25,500
Gain = 5,500
Return = 27.5%.

Now as we can see you have increase you gain by 10%, yes by 10%. (500/5000) = 10%

This is the gain by simply booking the profit just one time; you may even get more than one opportunity to book profit and in that case you return will compound and would be much greater than this 27.5%. And with the volatility of KSE 100, this is certainly possible.

I don’t think the mathematics behind this is complex to understand. See the Chart showing the price of any share for the last year and simulate the above mentioned strategy and see the magic for yourself.

Disclosure: The above technique can not always give you extra return as we always say that in Portfolio Management lot of variables influence the market and result of different strategies. The above technique is some thing that I have found to be useful and have worked for me many times, that’s why I shared it with you. The results of above mentioned surely can not be guaranteed and Investors can try this on their own responsibility. I will not have any responsibility for the failure of above mentioned strategy. The example that I have presented is an assumed scenario for explaining the strategy.

BRIEF INTRODUCTION AND ANALYSIS OF KSE 100

Greetings Everyone,

This Blog is initiated to assist both Local and International Investors who want to invest their money in Pakistani Stock Market or more precisely Karachi Stock Exchange which is the largest stock exchange of the country. The benchmark that we will use is KSE 100 Index which represents the performance of top 100 companies in the country. It should be noted that KSE 100 is a market weighted Index (which means that company with more market capitalization has more influence on the stock market). It should also be noted that OGDC which is the oil and gas exploration company has the largest share in KSE 100 market capitalization and therefore its movement affects the KSE 100 most. For now I believe this introduction in enough. I will be talking in detail for every aspect of Market in the coming days however at this moment let’s switch to analytical work which can help your investment decision.

MARKET ANALYSIS:

The cheapest market in the region trading at a multiple of around 7 has many investment opportunities and stock picking is not very difficult for now. As per my calculation with current macro economic situation (Pakistan achieved an Economic Growth of 4.1% in the fiscal year 2010) the market has a lower limit of 9,000 and upper limit of 12,200. That is, as long as market is near 9,000 market is certainly offering an expected return of around 30%. That also implies that investors should start booking profit as market starts approaching 12,000. It should be kept in mind that 12,200 is an upper limit this is the most where market can reach, if market faces an extreme bullish activity.

Today, on July 6, 2010 KSE 100 closed at 9,781. Which implies that investor can certainly invest in the market because market is far below from 12,200 and near to its lower limit of 9,000.

Risks to the Market: I do not see any particular economic risk to the market, but there are two non-economic risks that can hurt market’s sentiments. One is Law and Order and second is the on-going tussle between Government (and more particularly ruling party of Pakistan People Party) and Judiciary. Some corruption cases of Pakistan’s President Mr. Asif Ali Zardari are under the court hearing. About the former risk, with the successful military operation in South Waziristan, law and order situation has been improving. As far as second risk is concerned, as we all know this has the least effect on Country’s economy because political in-stability is actually a rule rather than a exception here in Pakistan. Therefore I believe unless this matter get worse will have no effect on the market.

Opportunities in the Market: With the upcoming leverage product we believe market sentiments will improve in the market and since we are the cheapest market in the region and also trading at around 22% discount to our historical average market is certainly very attractive.

Since this is my first article, it has gone a bit long but my future analysis (which would be bi-weekly in general unless situation warrant more) would not be as longer and I would be just guiding you with your portfolio management while discussing important economic and financial matters.

Now here is the list of my recommended stocks with their brief details including current price and target price. It should be noted here that these target prices are supposed to achieve within one year. In future I would also present more details regarding these individual shares.

Company Name: Pakistan Oil Fields (POL)
Industry: Oil and Exploration
Current Price: 215.58
Target Price: 246
Expected Return: 14.46

Company Name: Pakistan Petroleum (PPL)
Industry: Oil and Exploration
Current Price: 186.75
Target Price: 202
Expected Return: 8

Company Name:Attock Petroleum (APL)
Industry:Oil and Marketing
Current Price: 289.77
Target Price: 352
Expected Return: 21.3

Company Name: Pakistan State Oil (PSO)
Industry: Oil and Marketing
Current Price: 261.03
Target Price: 327
Expected Return: 25.3%

Company Name: Lucky Cement (LUCK)
Industry: Cement
Current Price: 63.46
Target Price: 78
Expected Return: 24%

Company Name: Dear Ghazi Khan Cement
Industry: Cement
Current Price: 24.43
Target Price: 32
Expected Return: 33%

Company Name: Bank Al Falah
Industry: Banking
Current Price: 9.19
Target Price: 14
Expected Return: 41

Company Name: National Bank of Pakistan (NBP)
Industry: Banking
Current Price: 64.75
Target Price: 75
Expected Return: 16

Company Name: Engro Corporation (ENGRO)
Industry: Fertilizer, Chemicals, Foods
Current Price: 176.17
Target Price: 208
Expected Return:18

Company Name: PACE
Industry: Real Estate
Current Price: 3.71
Target Price: 6
Expected Return: 62%

I strongly recommend investors not to invest all their money in just one stock or two stocks but should diversify portfolio in many stocks. This is how you portfolio performance will be based on the movement of market (which as we have already mentioned is represented as KSE 100 Index) rather the performance of individual stock. I follow these 10 stocks so you should at least invest in these 10 stocks. I selected these stocks because these are the stocks with the highest turnover (except PACE) in the market and also highly undervalued and offer very good expected return and are followed by most of the research analysts (except PACE which is not followed by many analysts but only by few). It should kept in mind that there may be many stocks in KSE 100 which may offer more expected return than this but since no research analyst and no investor can understand all the shares individually, keeping your focus on few (with keeping diversification in mind as well, i.e. few means that are just enough to diversify our portfolio appropriately) will serve our purpose.

For now, this analysis is enough. I will be discussing about these matters in future.

Disclosure: The above analysis is done to the best of my knowledge which I got from personal research. It is not possible for me to cite any references because I got this information from many resources including TV Channels, research reports and personal communication with market experts.

This material is written to guide investors in their decision making. Investors are supposed to be knowledgeable enough to understand the inherent risks in the market and use this analysis as one of the input in their decision making. There is certainly no guarantee that the above mentioned analysis is absolutely correct. This is certainly not a rocket science and forecasts may not realize.

I may have personal holdings in these stocks, in fact the stocks that I follow are usually the one in which I am personall invested.