our staff repoRE The expected cut in the SBP key policy rate and the drop in National Savings Schemes yields drove the bullish trend at the local bourses though uncertainty at global financial markets along with deteriorating US-Pak relations kept the investors nervous throughout the week. According to the experts, the investor behaviour gradually rationalized considering that there is a long history of love-hate relationship between the US and Pakistan. They said tat consensus among the top political leadership at the All Parties Conference (APC) along with a cut in NSS rates further restored investors confidence as KSE 100 index showed strength and gained 155 points (up 1.3 percent WoW) with average daily volumes improving by 15.7 percent WoW to 83 million shares. Furqan Ayub, an expert, said that impressive fertilizer offtake numbers (growth of 84 percent YoY in August 2011) triggered interest in the chemicals sector (outperforming the index by 2.7 percent), with ENGRO gaining 6.8 percent WoW. Moreover, interest was also witnessed in cement scrips amid rise in local prices with Construction and Material sector outperforming the index by 2.6 percent, with Lucky Cement gaining an impressive 3.1 percent WoW. Banking and the Oil & Gas sectors on the other hand underperformed the benchmark index by 0.6 percent and 1.1 percent respectively, on account of selective profit taking. Global economic uncertainty coupled with volatility in the Pak Rupee led to foreigners turning net sellers as they sold shares worth $7.3 million, while companies were net buyers of $12.2 million. Mohammed Sohail, financial expert, observed that rally in Pakistan government bond market continues. In anticipation of the cut in the policy rate amid expected slowdown in inflation, the benchmark 10-year PIB (Pakistan Investment Bond) trades around 12.99 percent yesterday, a level on seen in last 14-months. Further delay in the issuance of PIB to resolve circular debt also helped in the latest uptrend in PIB prices. In last 4-months the yield has fallen by approx. 125bps. So far in 9-months of 2011 the most traded issue of 10-year bond has rallied 16 percent (inclusive of interest) at a time when equities market provided a negative return of 3 percent. This trend of bonds beating equities in 2011 is in line with global trend where risk-averse investors have moved to bond market due to fear of recession in major economies. The declining yield on PIBs bodes well for local stocks. Theoretically a 100bps cut fall in bonds yield increases equity values by 8 percent, assuming no earnings growth. On the other hand this trend shows that money is flowing to bonds market from the equities. Fiscal deficit numbers for FY11 were released during the week. The deficit was recorded at Rs1.336 trillion or 6.6 percent of GDP. Interestingly, about 90 percent of the deficit was financed through domestic sources, contrary to the general perception of heavy reliance on external sources. On the positive side, FBR has provisionally collected tax revenues of Rs335 billion against the target of Rs320 billion for 1QFY12. Ahsan Mehanti, Director, Arif Habib Investments said that stocks finished higher this week led by Oil & Fertilizer sector scrips on stable global commodities, higher fertilizer sales data for August and easing circular debt concerns after Asian Development Bank conditional approval to eliminate debt in Pakistan energy sector. According to the analysts, global oil prices, interest rates, exchange rate, foreign investment & natural disasters have impacted market behaviour. Going forward, recent fall in intl oil prices & interest rates along with pressure on PKR may keep market under pressure. Hence, we advise exposure in defensive stocks. The correlation between the KSE-100 and world oil prices stands strong at 88 percent, however appears weak during 2005-06 (period in which banks outperformed amid strong M2 growth). Though higher oil prices bodes negative for the macros, heavy weight Oil and Gas sector is a natural beneficiary. Surprisingly, the correlation b/w interest rates and the KSE came out positive at 60 percent. Though a sharp rise in rates have led to a fall at the bourse; with market heavy weights mostly cash rich and banks benefiting on account of higher NIMs, KSE has shown improved performance in the longer term. The data suggests that in times of steep PKR depreciation vs. US$, the KSE-100 has remained under pressure. However, KSE has remained firm amid relatively lesser devaluation owing to its +ve impact on E&Ps & IPPs. The KSE-100 has depicted a mixed response to changes in government setup. However, the market in general has reacted positively to new PPP government setup (1M return: 21 percent in 1993 and 2 percent in 2008). The market has reacted negatively to natural disasters affecting local agricultural activities. In 1992 (floods), 2000 (drought) and 2010 (floods), the market lost 12 percent, 8 percent and 7 percent, respectively. However, KSE gained 2 percent in 2005 earthquake. In general, higher foreign investment has led to an upward movement at the KSE bourse. In 2H of 2009 and 2010, foreign investment of US$290 million and US$250 led to market appreciation of 31 percent and 24 percent, respectively.