investments ars report
TRANSCRIPT
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INVESTMENTS FINAL PROJECT
BSC IV
SECTION A
SUBMITTED TO: ASSISTANT PROFESSOR SALAAR FAROOQ
SUBMITTED BY :
HAROON M JANJUA
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Analysis of GDP of Pakistan
Pakistan went through four severe shocks during the last two years. The first negative shock that it
faced emerged from severe macroeconomic crisis. This was a result of the imbalances of the past
several years induced by policies. This was followed by a second shock that involved a largedeterioration in Pakistans net external terms of trade. This was the consequence of the increment
in the world commodity prices during 2007 and large part of 2008. This resulted in a severe supply
shock in the economy, especially in the case of the provision of energy. The third shock emanated
from adverse effects of the turmoil in global financial markets, whose external demand for exports
had been collapsed. Also, there was a sudden decline in the availability of external capital which
was needed to finance its fiscal and current account deficits. The market was affected adversely by
the global financial crisis. The investors in developing countries, including Pakistan came under
great periods of stress. And finally, in the period of 2008-09 Pakistan witnessed a sever security
challenge both in terms of the fight against extremism and in terms of knock-on effect on
investment inflows and market confidence. The effect of all these challenges has resulted in the
loss of growth momentum. The real GDP growth has fallen down from 4.1% to 2% as compared to
the last fiscal year. The country is expected to maintain this average growth rate of 2-3% in the
near future, keeping in view the world economic recovery.
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Inflation Rate in Pakistan
Pakistan had been witnessing a soaring inflation rate in the recent past to as high as 25% but with
the economic recession setting in the implementation of a tight monetary policy by the SBP it has
been brought down significantly to around 8- 9%. However, with an expectation of recovery in theworld market as well as in the domestic economy, it might not be reasonable to expect that
inflation levels would fall to much lower levels. In fact it might start to rise again as the SBP eases
its monetary policy to expand economic recovery.
State Bank of Pakistans Expected Monetary Policy
In view of inflationary pressures in the past, the SBP had been following tight monetary policy.
The central bank raised interest rates by 2 percent back in November, which was the fourth
consecutive increase since the global economic outlook receded in 2008. However, since the
economy has been growing at its slowest rate for eight years, interest rates have been cut. At
present the interest rates have been reduced to 12.5%. The overall level of risk and uncertainty in
the economy has increased considerably, given the present law and order situation. As a
consequence, the pressure on the fiscal position, especially from the financing side, has escalated
and growth in the real economy was limited. The monetary policy is not expected to ease down
significantly as inflationary pressures are still looming around the economy
The stock market in Pakistan
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The present turmoil being witnessed in this market and the world markets is nothing unusual and is
the part of the game in the world of high finance. This has been around for centuries nowfrom
lower levels, the markets begin to show positive signs of improvement, hope rises and people
begin to buy but then the euphoria crosses the limits of rationality.
It is the leverage or the borrowed money that is the root cause of financial chaos and havocbe it
the great crash of 1929 or the sub prime episode of the 21st century. They have led to the most
unusual and unprecedented step that has ever been taken by KSE to handle a situation: freezing of
share prices at 27 August levels. Psychological effects of this freeze on the thought processes of
the market participants have been more devastating than the misery that falling share prices cause.
Optimistically, the situation is likely to improve at KSE. This means that the opportunity to make
money shall continue to be there in this market. But the problem is that for the people, generally,
the definition of coming back of good times at KSE is only that the index should be at 15600 levels
again and the stock that someone bought at 319.70 must hit those levels again. Yes, that or nothing
else. Unless the possibility of seeing those same old high numbers flashing on the screens again
becomes a reality, majority of the people refuse to turn optimistic about the market. This is a very
misleading and unreal yardstick to gauge the future of the market. The levels that the market has
seen (index 15600, size 4.8 trillion rupees) were actually overdone, overstretched number. Those
levels may be seen again in four months but also we may not see those levels again in four years
even. In the meantime, the market will ultimately find its new range and stock prices will stabilize
at levels that are in line with this new regime of higher cost of production and slumping sales.
Investors will not be able to see the opportunity to make money in the stock market in the time
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ahead until and unless they consciously accept the new environment in which the share prices will
have gone through after an intense phase of downward adjustment.
Another reality that must be accepted is that the days of making easy money or making money
easily in the stock market are over now for the time being. In the bull run witnessed during past
some years, even casual participation in the market would prove fruitful. It would not even fall in a
straight line thereby making the option of going short as fatal as the decision to hurriedly pick up
stocks at apparently discounted prices. On the other hand, staying completely away from the
market till things are clear will not be viable either because, as they say, we miss 100% of the shots
that we never take. Peter Lynch said about working in the stock market, It is important to be able
to make decisions without complete or perfect information. Things are almost never clear on the
Wall Street or when they are, it is too late to profit from them"
So since times are difficult now, in order to survive and grow in the market there must be some
business plan to which must be adhered to with great discipline. The main goal should be
preserving capital by preventing it from being wiped out. Such a plan requires strict profit and loss
targets to be observed with extreme exactness.
Outlook of Oil
The price of oil has been at a record high since the last few years. The simple explanationbeing that the demand for oil is increasing rapidly whereas the production is near capacity for
several producers and the ever increasing demand for oil threatens to surpass the worlds oil
production. New oil fields and technologies being used have not given any satisfactory results and
have failed not only to provide the expected supply growth but have also failed in relaxing the
pressure on the oil industry.
The domestic oil value assessed in Pakistan is on the international value basis. About 85
percent of the oil required for domestic uses in Pakistan is imported. Back in the year 2004 various
subsidies were given by the government on the oil price as an attempt to protect the citizens from
the prospective record fuel costs and an attempt to reduce the rate of inflation in the country.
Financing these subsidies was a major burden on the economy and as a result the Pakistani
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government was under major financial stress. It is estimated that this subsidy amounted $232
million per month.
When the new government took over the rule of Pakistan in February 2008, it could not
endure the fuel bills. Hence this stress being faced by the government was a significant factor for
the hike in the oil prices. All these factors led to the first ever increase in the price of gasoline and
diesel in Pakistan in almost twenty two months. This increase took place on the 1st of March 2008
against the last increase that was witnessed in 2006 in the month of May. The price at that time
was raised by 4.2 percent and before that implementation of the increment in oil prices the
nationwide price of gasoline was 53.7 rupees per liter whereas the price of diesel was 32.57 rupees
per liter. The new prices of gasoline and diesel were increased by 5 Pakistani rupees per liter and
3.5 Pakistani rupees per liter respectively.
In January 2009 the price of petrol in the international market was around US$36 a barrel
and in Pakistani Rupees this translates into PKR 13.60 per liter in a barrel but Pakistani
Government did not decrease prices instead to cover the debt government was facing, it charged
record high prices of oil to even RS. 80 per liter. This hike in the oil prices was expected, the
reason being that owing to the record prices of crude oil import. For e.g. In February the price of
crude oil in the New York market was around $101.84 per barrel which was close to its record
price of $103.05 in same month. In May 2009, the oil prices were reduced jus a bit. Petrol and
HOBC was reduced by Rs. 1.45 per litre and Rs. 1.80 per litre respectively. The prices of Kerosene
Oil and Light Diesel Oil (LDO) have been kept unchanged at Rs. 51.87 per litre and Rs. 48.00 per
litre respectively. The price of High Speed Diesel (HSD) has also been reduced by Rs. 1.43 per
litre which will be notified In June-September2009 world prices did increase to 60-80 dollar a
barrel and so the prices in Pakistan reached to the level between RS. 60-70 per litre. There was
reduction in tax from Supreme Court in October which resulted in decrease in prices of around RS
10 per litre but government could not bear this as it is the most easy income generating source for
them. And so this prices reduction could not last for long. The prices at that time were RS. 51.7
and it was again increased to around RS. 62 per liter and remained around this level during whole
November
Outlook of Gold
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Comparing it based on global surge of the yellow metal, one tola rate also hit a new peak of
Pak Rs 38,000. One tola is equal to 11.66 grams. Current trading of gold is at Pak Rs 32,271 per
10-gram and Pak Rs 37,650 per tola. Gold price in Pakistan was Pak Rs 200 per tola higher than
Dubai. The international gold rate thereon soared to an all-time high of $1,195 per ounce and it
was expected the rising price trend may continue to persist amid sharp increase in demand by
investors and central banks of some countries. In Pakistan, the ongoing marriage season will pick
up pace after Eidul Azha. Consumers who try to purchase gold jewellery on spot rather going for
advance booking are the worst-hit in view of surging prices. Pakistans gold imports in July-
October 2009 surged to 673 kg ($20 million) as compared to 363kgs ($11 million) in the same
period of 2008, according to Federal Bureau of Statistics (FBS).
The gold price movement would largely depend on the rupees strength against the dollarand trend on international bullion markets. Contrary to the situation in the international market
where people invest heavily in gold, it is not hold any big attraction for investors in Pakistan.
However, in the international market, in light of the rising trend in gold
Analysis of Stock Positions
Active Portfolio
This portfolio was designed with the object of diversification so that adverse changes in
one sector could be compensated by favorable changes in another sector. The objective of this
essentially is to hedge the risk that may be borne by buying securities in the same industry or field
Moreover, a general idea about the performance of the different sectors of the economy during the
past year aided the selection procedure. For example, the fertilizer industry and the cement
industry were among those few industries that registered positive growth amid the economic
recession in Pakistan. Therefore, investment was made in Lucky Cement and D.G.Khan Cement as
well as Fauji Fertiliser Limited.
A hefty buying of Rs 10, 00,000 is done in the first week of the analysis and then buying
and selling decisions have been made in the subsequent 7 weeks. In week two the emphasis is laid
on having some cash in hand for unforeseen opportunities, which explains selling decisions for
stocks of Engro and Lucky Cement. On a market tip the stocks of Shield Corporation are bought
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to be sold in the subsequent week. Week 3 also focuses on selling more than buying. Because of
the declining rate in the Oil sector in the preceding weeks it was decided to buy back the stocks for
Attock Petroleum which according to our analysis was undervalued at 340 Rs but this decision
proved otherwise and we sold it off in week 7 at 331 Rs. In week 5 because of the availability of
excess cash in hand we decided to buy back stocks which had shown an increase in price. And the
market at that time showed some positive trend so it seemed like a good opportunity to invest in
some stocks for Banks and paper firms.
We will conclude our analysis by focusing on week 8 in which we made some buying
decisions based on increase activity and increase index values and after selling the stocks for JS
Global our final balance corrected for profit and loss showed an increase of cash in hand of about
16 %.
Passive Portfolio
The companies chosen to be maintained in this portfolio were those which were expected
to be performing relatively at stable growth rates. An investment of approximately Rs 10, 00,000
was made in these companies with the number of shares being bought depending on their relative
share prices. This portfolio was maintained for the two months of October and November 2008. As
no trading was done for this portfolio, all the shares were just marked to market at the closing price
of the weeks Friday. In the first week, this portfolio lost value by almost 30% but it gained 77% in
value by the end of the second week.
At the end of the last week of November, the value of this portfolio stood at Rs1,012, 209
compared to the portfolios value of Rs 999,984 implying an average weekly compounded growth
rate of 15.2%.
Index Portfolio
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In order to compare the market return with the portfolio return, the KSE 100index was
marked to market at the end of every week. At the start of trading in October, the index stood at
9508.27 points which reduced to 9206.21 points at the end of November 2009 implying that the
market had lost, on average, by 40% in the eight weeks under consideration
Thus comparing the returns from the three portfolios, it is evident that the stock portfolios
performed better than the market in general. Comparatively, the active portfolio performed better
than the passive portfolio even though the difference is not very much. However, it might be stated
that more active trading and a sharper and closer look on the market could have helped to magnify
returns further.
Intrinsic Values
One of the greatest limitations in calculating the intrinsic values of the stocks in the
portfolio has been the unavailability of data at the official site of the Karachi Stock Exchange. The
annual statements provided are of very limited number of listed companies and unfortunately, most
of the companies included in the stock portfolios are not among those very few companies. As a
result, intrinsic values are calculated for ten of those companies whose financial data, primarily
earnings per share (EPS) are available for both the year 2005 and 2009. The intrinsic values are
calculated using the multiple growth models.
The values of EPS have been used to calculate the average historic growth rate of the
company (g) and this g is then adjusted upwards or downwards according to the expected
performance of that company, the expected performance of the industry it operates and the
expected performance of the economy of Pakistan to calculate the expected earnings over the next
years. Beyond ten years, a different g, usually a relatively lower number is used to reflect the
expected long-run growth rate of the company. Another important variable regarding the
calculation of a shares intrinsic value has been the discount rate, also known as the required rate
of return (k). Theoretically, k is calculated as the sum of the risk-free rate and the product of the
companys beta and market risk premium. As beta is unique for every company, k is different for
every company. However, for simplicity of calculation and time constraints, k is kept constant for
all the companies. Also since it is relatively complicated to calculate individual betas, it is also
held constant, implying that the required return is equal to the market return. This makes intuitive
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sense because investors require a return at least equal to the markets rate of return. So the value of
k used to discount future expected earnings is 12.54% which is calculated as the average
compounded rate of return of the KSE-100 in the last five years, from 4473.93 points (Jan 2, 2004)
to 9087.7 points (Dec 2, 2009). Also, firstly, since data for dividends is not readily available for
most of the companies, and secondly, some companies have not been paying dividends lately as
the average financial performance has not been very good in the past two years in particular,
therefore, the value for the most recent EPS is used to calculate future expected earnings. This is
likely to make a logical sense as these earnings are either paid out as dividends or reinvested in the
company, in both cases they benefit the shareholder, directly in the former case and indirectly, in
the latter case. Thus the intrinsic value of each share is calculated as the present value of future
earnings compounded at a rate of g1 for the first ten years and g2 for the eleventh year onwards,
discounted at the rate of k.
RsRs
(12/03/09)
Company Name Symbol Intrinsic ValueMarketPrice over/ under valued Buy/Sel
1 Attock Petroleum APL 119 332.78 over valued sell
2 Shell LPG SGLLR 1312 60 under valued buy
3 Engro Chemicals XD ENGRO 344 179.52 under valued buy
4 Indus Motors INDU 413 205.42 under valued buy
5 Lucky Cement LUCK 2024 63.26 under valued buy
6 Fauji fertilizers Limited FFL 265 25.96 under valued buy
7 D. G. Khan Cement DGKC 17 27.82 over valued sell8 Glaxo smith Kline Pak GLAXO 110 96.12 under valued buy
9 Hub Power Co HUBC 21 30.6 over valued sell
10 Ghani Glass Limited GHGL 57 52.35 under valued buy
.
As shown in the table above, Shell LPG, Engro Chemicals XD, Indus Motors, Lucky Cement,
Fauji Fertilizers Limited, Glaxo smith Kline Pak and Ghani Glass Limited are undervalued and
these shares could be bought as it is likely that their price will rise in the future, allowing for
capital gains. Similarly, Attock Petroleum, D.G. Khan Cement and Hub Power Co. are overvaluedas their current price is above their intrinsic values and therefore they should be sold as their prices
would eventually fall. However, some very odd intrinsic calculations are obtained for SGLLR and
LUCK which are difficult to explain. One possible reason is that SGLLR has had a high EPS of
93.76 while LUCK has had a high average growth rate of 35% accounting for such high intrinsic
values.
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%
Company Name SymbolHistoric growthrate g1 g2
Attock Petroleum APL 0.7 3 1
Shell LPG SGLLR 7.6 6 4
Engro Chemicals XD ENGRO 7.07 10 5
Indus Motors INDU 11.5 7 3
Lucky Cement LUCK 35.2 37.5 10
Fauji fertilizers Limited FFL 7.6 10 5
D. G. Khan Cement DGKC -26.4 1.5 0.5
Glaxo smith Kline Pak GLAXO -8.8 2.5 1
Hub Power Co HUBC -16.6 2 1
Ghani Glass Limited GHGL -4.5 1 0.5
ACTIVE PORTFOLIO
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WEEK 1
WEEK 2
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WEEK 3
WEEK 4
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WEEK 5
WEEK 6
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WEEK 7
WEEK 8
PASSIVE PORTFOLIO
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WEEK 1
WEEK2
WEEK 3
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WEEK 4
WEEK 5
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WEEK 6
WEEK 7
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WEEK 8
KSE 100 INDEX
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