The articles written on this blog are based on my personal analysis. The securities target prices are for information only and is not an offer to buy or sell. The reliance on these recommendations are not guaranteed as they are based on my personal assessment as a Financial Analyst. My analysis is based on Business TV Channels, Business/ Financial websites, and from Finance books. All views that I presented are to the best of my knowledge and I invest in Stock Market with this analysis in mind. While the information contained herein is from sources believed reliable, I do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time.

Thursday, October 14, 2010

Bullish Market with Shaking Fundamentals

First, let me describe the relation between Interest rates, Inflation and Stock Market. The relation is very simple, increase in interest rates are inversely related to Stock Market Valuations. Increase in interest rates has negative effect on Stock Market. Secondly, Inflation is also negative for market because generally interest rates increase is associated with increase in inflation.

Now what happened in Pakistan is that growing inflation has caused SBP to increase interest rates. In their September Monetary Policy, SBP has announced the increase in discount rate by further 0.5%. So now, the discount rate has reached 13.5%. Keep in mind that just before April 2009 when this same discount rate was at 15%, market was hovering around 4000-5000 level. However that low of market was not just because of discount rate but there were some other issues were there as well like investors sentiment had not recovered from imposition of “Floor” by government. However, what I want to say is that this discount rate is very important for stock market valuation.

The figures for September show that Inflation has now reached 15.7%. Discount rate is 13.5% and most in Analyst Community believe that further increase in discount rate and inflation can be seen. Inflation can increase b/c of following issues:

1. Floods have decreased the supply of food items, causing an increase in their prices.
2. Imposition of reformed GST will also increase inflation.
3. Increase in Power Tariffs due to withdrawals of subsidies will also increase inflation.


It seems that market has completely ignored the current scenario. Many believed that market would show negative-neutral reaction to SBP recent Monetary Policy Stance. However, market has actually shown a positive reaction. Today on 14th October, market crossed 10,400. Many investors wonder why and how?

To be very honest, I am also surprised. I didn’t sell my shares though but I stopped new buying. Following could be the reasons of this rally:

1. Foreign investors are continuously buying.
2. Leverage product is expected in market. (Which means investors will be able to borrow money to buy shares).
3. Floods effects are temporary and they will be reduced with time. Further they will have a positive effects for short-medium term on cement sector (because of re construction activities), fertilizer sector (floods increase water level and enhance productivity), and pharmaceutical sector (flood victims are having health problems).
4. Reformed GST and increase in Power Tariffs will also have a temporary effect on Inflation and dust will settle down few months after reformed GST is implemented and Power Tariffs increased.
5. Companies have posted very good results.


My advice is simple; if you are a salaried class investor with diversified portfolio (having many stocks) then don’t worry and keep investing in good blue chip and selective undervalued second tier and third tier companies as well. If a market takes a dip, you can buy shares at cheap prices with your next monthly saving from salary. If market keeps going up, keep investing until market reaches around 11,000. However, if you are not a salaried class or don’t invest periodically in market then I will recommend a very cautious stance. Because “FUTURE SITUATION IS NOT AS CERTAIN AS CURRENT SITUATION” and current situation isn’t very good and market can take a dip. Once a market takes a dip (small dip of 200-400 is very likely though as per my expectation) they can invest. Currently they should keep 25-35% of their money as Cash.

Remember as per my expectation market’s level should be between 9000-11200 level.

Thanks and Good Luck with your investments. You can post a comment if you have any question or you can send me an email at tahiradeel001@yahoo.com.

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