Pakistan Review News and Reviews

Equity market set to attract more investment

KARACHI (November 25 2002) : After cut in lending rate by the central bank, equity market is set to attract genuine long-term investments as the returns offered by several companies are in double digit compared with other government securities at less than eight percent.

The State Bank of Pakistan has cut the benchmark discount rate by 150 basis points to 7.5 percent. State Bank had reduced the discount rate five times since July 2001, when it stood at 14 percent.

The cut-off yield on six-month treasury bills is 6.37 percent, yield on 10-year bond is less than 8 percent while after the adjustment in Pakistan Investment Bond coupon rates, returns on National Saving Schemes would fall from present 10.7 percent.

Following the cut in discount rate cut the KSE Index performed well and share prices have surged at an amazing rate as investors look to reap as much gain as possible through the purchase of good dividend yielding stocks.

Fundamentally speaking, the impact of the discount rate cut has been doubly beneficial for Sui Northern and Sui Southern due to their huge outstanding debt, whose costs are likely to go down.

The PTCL 2002 dividend was Rs 2.75, as per its last share price of Rs 22.65, dividend yield worked out to be 12 percent, Hub Power's 2002 dividend was Rs 7.6 per share and the last share price was Rs 28.60, dividend yield stood at 26 percent, Fauji Fertiliser in 2001 paid a dividend of Rs 8.5 per share, where last share price was Rs 62.5, dividend yield 14 percent and Sui Northern Gas dividend was Rs 2 a share in 2002 and the last price was 18.75 with dividend yield of 11 percent.

Iffat Zehra, head of research of IP Securities, said that cut in lending rate would be very favourable for corporate planning expansions in the near term as the low interest rates scenario would mean lesser financing costs and ultimately more free cash flows with its shareholders.

Additionally, equities offering yields of around 12 percent are likely to become more attractive, complemented by the fact that there are very few other investment alternatives.

Analysts foresee more fresh funds to float into the stock market after the possible rate cut in National Saving Schemes. Already, the de-dollarisation process has started following the appreciation in value of Pakistan's rupee versus dollar. Moreover, there has been reverse of capital and now the funds are filtering into the banking system and according to an expert, banks deposits would surely see a growth at the current year (2002).

He said that the lower yields on bank deposits, NSS and fixed income securities are also bringing in new long term investors in the market. With blue chip stocks still offering cash yields of more than 12 percent, the decline in discount rate will further increase the flow of investment funds into the market, thus reducing volatility while driving up stock prices, ie higher expected returns on investment and trading stocks

Source:

Business Recorder (http://www.brecorder.com)