KARACHI, Sept 18: Given the current price levels at the stock exchanges and the emerging trends in the economy, an impression is gaining grounds that the current phase of steep rise in the stock prices is over at least for the time being. Excluded from this view is the windfall from any exogenous shocks. Financial analysts say that it is time for investors not to look for big capital gains but towards dividends from core income stocks. The recent company announcements on profits have been mixed but generally favourable. For most sectors, they say the long term outlook, at this point of time, is positive.
A Taurus Securities study says that corporate earnings rose by about 29 per cent on the whole for companies which had reported their earnings by end of August 2004. Going by the financial results for the first half of this year, banks are strong performers. Sectors like cement and fertilizer are showing improved performance.
Though speculation has played a vital role in pushing up prices at the stock exchanges to current levels, the government has also strengthened the market by floating shares of profitable enterprises. The process is continuing. In the next 15 months or so, some of the banks, depending on their financial health, may raise their paid-up capital by offering right/bonus shares.
Banks are now required by the State Bank to raise their capital to Rs2 billion by the end of 2005 as against a minimum of Rs1.5 billion net of losses for December 31, 2004.
One option for the weaker banks may be to merge with stronger peers or non-banking financial institutions as has happened recently. The paid-up capital and equity of most major banks exceeds the State Bank's capital requirement. Many small private banks have enough equity to issue bonus shares to make up for the shortfall in the paid-up capital.
In some leading banks, the paid-up capital exceeds the SBP's capital requirement. For example, the paid-up capital of National Bank of Pakistan is Rs4924 billion and total equity amounts to Rs20,124 billion. By and large, the financial health of the commercial banks has improved over the past five years to get a positive response from the stock exchanges in their efforts to mobilize capital.
The issue of right and bonus shares by banks is a distinct possibility and combined with the off-loading of shares of public sector enterprises, these would deepen the market despite the worries about Capital Value Tax (CVT). The levy of CVT sends a signal to the market that share transactions need to be fully documented and profits made on trading should be adequately taxed. Replacing Badla by margin financing is to have a more formal mode.
Prime Minister Shaukat Aziz says the CVT issue has been settled while keeping the doors of negotiations open to remove irritants, if any. It is time for some of the excessive speculative money flowing into stocks to find avenues for productive channels.
Perhaps, more important for the markets are the emerging trends in the economy. "Certainly, macroeconomic factors points towards caution," say financial analysts.
Inflation and interest rates are rising. The high fuel prices, being absorbed by the government, are impacting fiscal deficit. And a depreciating rupee on the back of yawning trade gap is being financed by not so certain levels of flows of remittances. Wheat imports and the outlook for Rabi crops are not very encouraging signs. All these factors impact corporate profits one way or the other.
Financial analysts say that investors seem to be assessing the emerging situation. And the stock brokers are seizing on the pause to extract some concessions on the CVT issue and margin financing.