SALMAN ABDUHOO LAHORE - Quarterly results will determine the market direction next week, as during the outgoing week mixed corporate and economic news flows resulted in a range-bound activity at the local bourse, with the KSE-100 index closing up by 2.9 per cent or 334 points at 11,886 level and volumes strengthening to 78m shares, up 25 per cent WoW. Experts said that FIPI flows remained positive during the week, clocking in at $2.9m compared to last weeks inflow of $4.8m. On the local front, major seller category was individuals which clocked in at $2.9m. The SBP announced its policy review last weekend and as largely expected, it kept the DR unchanged at 14 percent for the next two months. Moreover, in the wake of hike in international oil prices, the government increased local oil prices in the range of 9 percent to 13 percent. Overall, banks and construction & materials sectors outperformed the market, while oil & gas underperformed. In contrast to last week, foreign buying activity was dull and stood at US$3mn. ADB and WB approved loan worth US$775mn to rebuild infrastructure damaged in the countrywide floods and to provide cash transfers to the flood affected people. We believe, this will help improve C/A balance, especially in the wake of soaring international oil prices. In addition, the FBR continued to work on a campaign to bring non-tax payers into the tax net so as to reduce the deficit gap. We opine, this along with the unstable domestic & intl political scenario has had a -ve bearing on investors sentiments, as reflective from low vols. of 78mn shares versus YTD avg. of 122m shares. The KSE-100 posted a negative return in 1Q for the first time in last 10 years, largely on the back of 1) intensified political noise, 2) growing tensions within the MENA region, 3) concerns over effects of the dreadful earthquake in Japan, and 4) announcement of new taxes amid inconclusive talks with the IMF. However, the market showed some resilience, closing the quarter down only 2 percent - largely at par with the regional markets. Foreign investment, which had largely dominated the local bourse in the last few quarters, too slowed downed and trailed its previous 4 quarters average by 60 percent at US$52.5mn. Interestingly, volumes failed to gain any momentum despite the launch of the much awaited leverage product after a gap of ~2 years and were recorded at an average 123mn shares (US$64mn). Political noise intensified as 1) opposition (PML N) turned hawkish and removed PPP from its coalition in Punjab, 2) political allies in JUI (F) and MQM parted ways, however the latter returning to the fold after negotiations and 3) question marks over diplomatic immunity of Raymond Davis for killing 2 people in Lahore strained ties with the US. On the corporate front, the market is waiting for resolution of the inter-corporate debt, rollover of govt. t-bills & PIBs in the next quarter, and possible policy measures that may impact corporate earnings. Already, the govt. has announced a 15 percent flood surcharge, amongst other measures. While activity may remain muted on these accounts, some stock specific activity could be seen on upcoming Jan-Mar result announcements. MTS investment (Mon-Thurs) stood at Rs228mn, whereas average rate stood at 17.49 percent compared to 18.78 percent last week. While the government introduced fiscal austerity measures through the introduction of 15 percent flood surcharge, increasing special excise duty to 2.5 percent and removing sales tax exemption on few sectors, talks with the IMF remained largely inconclusive for the release of the next tranche. From the KSE vantage point, these measures are likely to reduce corporate profits by an average 2 percent in FY11. Further, rising international commodities prices due to tensions in the MENA region raised concerns over Pakistans macros. Fertilizer scrips were the highlights of the quarter, outperforming the KSE-100 by an average 30 percent. FFC and engro were the highest gainers on the back of rise in fertilizer prices and also news flow on public offerings of subsidiaries in the case of the latter. Banks were largely non performers as concerns remained over their NPLs while, cements underperformed due to rise in coal prices. Index heavyweight OGDC too, underperformed the market by 19 percent, contributing to a loss of ~620 points in the KSE 100 Index. Monetary policy announcement - stability in policy discount rate at 14 percent - during the week was broadly in line with market expectations and thus remained a non-event for the capital market valuation. Activity in the next week would be governed by investor interest in the upcoming result season. We recommend select exposure in stocks with strong fundamental valuations which include ENGRO, FFC, POL, PPL, APL, UBL and MCB.