Fixed Income Market Performance
The money market remained volatile during the month where overnight REPO rates remained on the higher side for most of the month. The central bank remained active and carried out OMOs during the month. The SBP raised Rs 229bn through T-bill auctions in July against Rs 175bn of maturity while the cut off yields in the last auction remained unchanged across the board. At the end of the month, the central bank surprised the market by increasing the policy rate by 50bps.
Equity Market Performance
KSE-30 index rounded off Jul-10 as the best month for 2010 to date with 9.7% gains despite introduction of capital gains tax (CGT) from 1st July. In a regional context, this placed KSE as the second best performer for July. The performance was slightly overshadowed by the surprise announcement by SBP at month end where contrary to market expectations, the discount rate was raised by 50bp to 13% as the SBP cited inflation and fiscal account pressures as the main reasons for the move. Volumes declined due to the initial tentativeness of CGT introduction and registered a 20% decline MoM to US$30mn. The robust performance despite uncertainties related to capital gains tax was possible due to continued Foreign Portfolio Inflow (US$42mn in Jul; +40% MoM) and expectations of early reintroduction of leverage at the KSE. The product which is a close variant of the previously prevalent CFS product has been approved by the KSE and is awaiting SECP and government nod. However, there are a few concerns from the financier’s end, which may lead to a delay in implementation or an alteration in the product structure.
Fund Performance
During the month of July, the fund underperformed its benchmark by 2.94%. The fund gave an absolute positive return of 1.04%, while the Benchmark increased by 3.98%, mainly due to the mark down on placement and debt instrument re-pricing. With restructurings largely in place, we remain positive on the income portion of the fund for the next year.
Income Market Outlook
The country’s consistently high fiscal deficit has become a major challenge as the government is financing itself either by borrowing from the commercial banks (which is crowding out the private sector) or from SBP (which is keeping inflation higher). As these problems are expected to remain intact in the short term, we expect the interest rates to remain on higher side.
Equity Market Outlook
We believe market will take direction from quantification of losses in sectors and companies as well as overall economic impact of the devastating floods. The impact on the fiscal side, which was already under pressure and its resultant impact on the monetary side as well as quantum of aid flows would be key factors for future market direction. We believe market would remain largely range bound during August.