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Morning Call about – Foreign flows to KSE100 solid, 7% YTD’13 share in Asia Pac region! – Arif Habib Limited

Karachi, June 25, 2013 (PPI-OT): Market melts on rare of a kind political development in country’s history With the fresh flow of political developments that took place yesterday, KSE100 took a nosedive of 699pts intraday with a blink of an eye (greatest intraday decline ever as available information).

According to Arif Habib Limited KSE100 fell close to 650pts (-3.0%, USD 1.48bn) yesterday as the ruling party chief, and Pakistan’s premier, decided to lodge a treason case against the last military ruler, and the ex. chief executive of the state, Mr. Pervaiz Musharraf for amending the constitution twice in his tenure.

Though mechanics of the entire development still vague as yet, the move in itself was thought to be a rare and bold one by a civilian gov’t to try an ex. military ruler through the highest constitutional codes for treason.

Bold stance on part of the civilian gov’t as the autocracy ruled politics for over half of the country’s age. Thus, along with rising fears of a possible drain of foreign flows amid global sell- offs, investors felt shocked by this and shed their holdings in a haste of a second.

Corrections only making market valuations more compelling
Interestingly, despite such a huge battering, KSE100’s YTD return now stands at 24.5% (22.4% in USD term), still highest in the region while the entire Asia Pac peers are in the shedding mode except Indonesia and Vietnam (see first table alongside) while all key MSCI indices were outdone by Pak equities YTD.

Even during the month of Jun’13 so far, the KSE100 only shed 3.9% (2nd time a negative return in a month out of the last 13 months of straight run-up since Jun’12) while the Asia Pac region and few MSCI indices were mostly showing downward trend in equities.

Pak equities’ foreign flows share at astounding 7% of Asia Pac’s total YTD
Surprisingly, and a bit of a concern too, foreign flows to Pakistan equities now have an astounding share of 7% of the total net flows to Asia Pac region Jan’13 to date (see 2nd table on the left).

This is quite startling as the share of foreign flows that Pak equities have had in the past hardly made up about 1% of the total flows to the Asia region. KSE100 received a net inflow of USD 408mn Jan’13 to date vis-à-vis net inflows of USD 6,051mn to the entire Asia Pac region.

Only market with net receipts MTD while rest of the Asia Pac drains
In the month of Jun’13 so far, even when the entire Asia Pacific region experienced negative flows to equities with net massive outflows of USD 13.2bn MTD – after the Federal Reserve called for limiting stimulus – encouragingly, only Pakistan equities across the entire region stood with positive net inflows of USD38mn.

This substantiates foreign investors’ resilience and enthusiasm towards strong and investor-gripping underlying fundamentals of Pak equities. While the latest easing from the central bank (50bps to 9%) is still to make a positive mark on equities (market valuations upgraded by 2%, see our piece on stock-wise impact released yesterday), which was overridden by the yesterday’s unusual political development, recovery in the KSE100 is imminent given it is still a cash market with total futures open interest at around PKR 4.0bn.

As far as KSE100’s relative charm to regional peers is concerned, Pak equities still provide massive discounts on all key multiples (see table alongside). While the fundamentals of the market are still intact, with full-year results being around the corner once June ends, Arif Habib Limited suggests investors to keep a cautious eye on equities and take gradual charge on valued stocks (Cement, Textiles, IPPs, OMCs and Telecom) as soon as the situation on political front turns clear and better.

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