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Expectations of high corporate earnings

KARACHI: The country’s stock market after pocketing huge foreign investment in its coffers in the recent times is all set to receive another boon in the form of high corporate earnings, which analysts believe will record double-digit growth during 2011.

karachi stock exchange“As robust foreign buying remains the major attraction for local bourses, corporate earnings is the other major factor that will cheer the market players this year,” equities’ analysts predicted in their forecasts for the future trend of the market in the current calendar year.

The corporate sector had remained in the grip of stagnancy for the last four years (2007-2010) when its earnings remained flat due to a host of issues the economy and sectors confronted during the years under review.

Based on the high earnings anticipation and continued inflows in the stock market from foreign funds, the market would likely to cross 14,000 points level by the end of the current calendar year.

Although, different sectors would put their weight behind the market in the shape of improved earnings, it would be energy, banking and cement sectors which would lead the market in the coming days.

Topline Securities analyst Farhan Mahmood said that the earnings growth in FY11 would be robust at 20 percent, which would continue in FY12 and FY13 but at a lower pace due to below average gross domestic product growth and non-resolution of the circular debt issue.

After FY11, earnings growth will stabilise at 10 percent resulting in three-year average annual earnings growth of 13 percent in line with the inflation expectations. This earnings growth compares favourably with the last four years average annual earnings growth of only four percent (average inflation 11 percent). However, the next three years earnings growth of 13 percent is still less than last 10 years average growth of 16 percent (with 10-year average inflation of nine percent).

Though the expectations are quite high on the future course of the market but most of the investors are a bit worried about the new taxes whether they are the flood surcharge tax or the asset tax etc and its impact on the earnings of the companies.

Farhan said that if 10 percent flood surcharge tax is applied for six months effective from January 2011, it would affect the annual corporate earnings by 2.0 percent. On the other hand, if government charges taxes on fixed assets like the one under Finance Act 1991 and assuming 0.5 percent tax incidence, it would affect corporate earnings by 1.0 percent.

On the other hand, market players, though foresee a positive picture of the coming days viz-a-viz the stock market on the back of healthier earnings, however they were sceptical about the sustainability of increasing trends if the market remained devoid of a leverage product, which has been missing since a long time.

Corporate earnings alone could take the market to new heights, they pointed out because the lack of financing products would keep the investors’ confidence depressed and for the smooth sailing of the market, at least one of the leverage products proposed by Securities and Exchange Commission of Pakistan should be launched in the market.

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