AKD Quotidian about — Pak-USA tension: Panic Warranted?

Karachi: Sep 24’11 – President Obama’s to Foreign Minister Khar: “The US has no suspicion over the character of Pakistan, but has suspicions against the terrorists who carry out attacks in Afghanistan from Pakistan” (South Asian News Agency)

According to AKD Securities, The KSE-100 Index has shed a sizeable 4% over the last 2 trading sessions, ostensibly due to deteriorating US-Pakistan relations. While cognizant of risks if events unfold to the contrary, AKD Securities believes war- mongering and/or economic sanctions appear half-baked at this point in time (net FPI of US$1.O2mn yesterday). In AKD Securities’ view, more realistic precedence is set by the Raymond Davis issue and the Osama bin Laden operation when the KSE-100 Index shed 9% and 3%, respectively, before recovering smartly. Besides President Obama’s more conciliatory tone, AKD Securities draws attention to Chinese vice premier Meng Jianzhu’s 2-day visit to meet top Pakistani political and military leadership. Although Chinese foreign investment (both FDI and FPI) in Pakistan is low compared to the US, the Asian giant is swiftly on its way to becoming Pakistan’s largest trade partner. Going forward, provided normalcy returns to US-Pakistan relations, the KSE-100 Index (FY12 PER: 6.2x) continues to offer sizeable return potential (12m Index target: 13,750 points). AKD Securities’ top picks include ENGRO, FFC, PSO, POL, LUCK and MCB.

China’s growing importance: Although the KSE-100 Index shed a staggering 2.9% yesterday, AKD Securities believes 1) net FPI of US$1.O2mn yesterday, 2) visit of Chinese vice premier Meng Jianzhu and 3) Saudi Arabia stepping in to ease tensions are prescient. A swift return to normalcy in US-Pakistan relations should unlock sizeable upside at the KSE-100 Index as any economic sanctions would likely be very disconcerting – the US continues to be Pakistan’s largest export destination and an important donor. That said, from a longer-term perspective, China’s economic relations with Pakistan may soon rival the US. While the US remains Pakistan’s largest export destination, its share in Pakistan’s total exports has reduced from 22% in FY04 to 16% in FY11. In contrast, bilateral trade with China is on the up – China’s share in Pakistan’s exports has increased from 2% to 6% across FYO4-FY11. Further impetus to latter may arise from a proposed currency swap agreement.

Investment Perspective: The KSE-100 Index has gained almost 2% in intraday trade, with bullish momentum led by both 1) a rally in regional markets and 2) some easing in US-Pakistan relations. Regarding the latter, should normalcy return, the KSE-100 Index (FY12 PER: 6.2x) continues to offer sizeable return potential (l2m Index target: 13,750 points). While the Index may continue to depict volatility in the immediate-term, a trigger could arrive as early as Oct 8’11 when AKD Securities expects a DR cut of at least 50bps.

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