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Morning Call about – Democratic transition gains confidence for early economic revival – Arif Habib Limited

Karachi, May 16, 2013 (PPI-OT): As the veteran political party, PML’N, plans to diligently rein in country’s administration –only a few days away– post Elections 2013, Arif Habib Limited has seen a number of developments taking place for country’s good that have reflected into capital market’s gaining more momentum (~22% return YTD) as well as significantly improving market activity post-elections (average volumes 333mn, +78% WoW).

According to Arif Habib Limited this reflects growing investor confidence in the political change for a better Pakistan. Foreign net flows also topped USD 220mn, up 80% YoY. Instant confidence gained from int’l community support for early revival.

The change in Pakistan political setup, with PML’N pulling simple majority, was so readily welcomed by the int’l community that, even before the PML’N could take official oath, Mr. Sharif (expected Premier) was already flooded with a number of confidence-boosting responses from around the world –opening up new horizons to lock-in for trade and investments for the country.

This not only included a new relationship-beginning offered by the US at parallel footings, but also a loaded bouquet from the UAE offered in the form of investments in key areas through the mega Abu Dhabi Fund (valuing USD9.5bn). No wonder why Arif Habib Limited observed persistent aggressive stance of the EM gurus on Pakistan, including Mark Mobius (already invested over USD850mn in Pak equities).

PML’N gov’t to help resume investment flows through strong bonding With revival expected in foreign investments, Mr. Sharif’s competitive advantage can also bring in funding / in-kind support (crude oil/commodity import facility on deferred payments) from the Saudi rulers with whom he enjoys excellent bonding.

If materialized early on, this should lead to diluted IMF need while creating a bargaining position for Pakistan, let alone improving trade ties with India (IPI gas pipeline and trade), Iran (improved barter trades) and China (swift progress at Gwadar port). Last not least, country’s steering going into established political hands was also hailed by the SandP that would further help sanitize Pakistan’s image in the eyes of foreign investors/donors.

All-friends-no-foes a rare attitude shown by PML’N for country’s good Pakistan’s political maturity seems to be on its way as the transfer of power has taken democratic route in Pakistan. And, it was quite evident when, unlike earlier anecdotes, the PML’N chief, Mian Muhammad Nawaz Sharif, after gaining the lead in the Elections 2013, showed whole-heartedness towards even toughest of his political rivals and met PTI’s chief, Mr. Imran Khan, for shedding personal grievances while putting country’s interest ahead of all. Encouragingly enough, Mr. Khan equally welcomed the move with heed, which should serve to yield improved outlook for the country’s political landscape.

PML’N’s economic track-record merits expectations for early turnaround As mentioned in Arif Habib Limited earlier writing piece, PML’N in its prior mandates, performed better than peers (table alongside) through good governance and business-friendly policies, despite having short tenures (Nov’90-Apr’93 and Feb’97-Oct’99).

Therefore, with simple majority and boarding even key rivals along, while having sensible economic manifesto tagged with action plans, PML’N is well-equipped to turnaround even toughest of economic woes despite having low representation in the upper house (Senate) for legislation.

In addition, a feel-good factor with the Judiciary should also provide PML’N with a needed piece of mind in implementing even politically-sensitive economic reforms while an active opposition keeps a strong check-and- balance for better decision-making. Thus, high expectations of the investors on early economic revival are somewhat justified despite mounting challenges.

Encouraging response to soothe sector-level concerns
To appease investor concerns specifically with respect to the fertilizer sector gas curtailment, Mr. Shahbaz Sharif (former CM Punjab and second-in- command in PML’N) stated in a recent TV show that fertilizer factories will not be shutdown and will be allowed to operate according to a schedule. This indicates that upcoming gov’t understands the strategic importance of all the key sectors, including that of fertilizer (already facing acute gas shortages).

Arif Habib Limited tops stocks from the sector include ENGRO.
For load-shedding management, Arif Habib Limited expects the new setup to arrange short- term liquidity injections for power sector in general (especially small IPPs in Punjab), and PSO in particular, to ensure smooth fuel (FO) supply, before PML’N’s economic team implements long-term structural reforms in the energy chain (top picks include HUBC, KAPCO, NCPL and PSO).

Other potential sector to benefit from PML’N’s infrastructure-loving policies is Cement (top picks LUCK, DGKC, KOHC and FCCL) while expectedly better power management in Punjab should bear fruits for industries, especially Textiles (top pick is NML). On the other hand, Arif Habib Limited expects banks to benefit in the long run from overall economic revival (UBL, BAFL and NBP).

On expected improvement in law and order, given PTI’s upcoming setup in the KPK (PML coalition in Baluchistan) and similarity in PIT’s and PML’N’s ideology with respect to insurgency, Arif Habib Limited expects improved drilling activities and increased investments from foreign EandP partners (POL, PPL to benefit).

Though pace of market return in last three sessions post-elections’13, is much higher than historically averages (19% in 3M, 23% in 6M and 23% in 12M), we expect market to rationalize its levels with gradual developments on economy. Arif Habib Limited reiterates KSE100 index target at 22,755pts. Key risk to Arif Habib Limited calls remains any delays in funding deals (IMF and other investment flows) as well as any unforeseen surprises in the Budget FY14 as it holds key in assessing new political setup’s strategy going forward.

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