omc: no mention; hence safe - BMA Capital Management

STRATEGY
Budget Impact
Neutral
Hamad Aslam
Head of Research
8
MARKET STRATEGY: GRIST TO THE MILL
June 7, 2010
Entailing no major surprises, the federal budget FY11 remained broadly neutral
for the capital markets. Consensus had been achieved on end of exemption on
CGT w.e.f from July, 2010 between the three largest stakeholders i.e. stock
exchange, FBR and stock brokers. While a paper on exact modalities on the
said tax is awaited from the authorities, the tax brackets are largely in-line with
the ones announced in Feb, 2010.
CGT; Viewing it as market stabilization vehicle
With around 50% of KSE traded volumes dominated by individual investors,
their psyche and response to tax imposition remains a crucial determinant of
overall market reaction. Individuals are largely hesitant in filing annual tax
returns and thus aforesaid tax regime has given birth to concerns on future
trading activity on the local bourses.
While we do not downplay this concern, we would like to highlight that equity
trading activity for all investors (individuals and companies) is already
documented via earlier introduced Unique Identification Number (UIN).
Moreover, with the CGT having been announced as early as Feb10, the budget
announcement is not likely to result in a knee-jerk reaction in the index.
On the flip side, we argue that CGT inherently encourages long term investment
by reducing the incentive to book short term gains and thus acts as a
stabilization vehicle for the market.
Sector specific measures; Banks to stand out
Unlike previous years, the budget announcement largely maintained a statusquo
on most of the government’s sector-specific policies. Commercial Banks
however stand to gain from better cash flow arising from increased tax
allowance on provisioning expense.
Though largely neutral for Textiles, the budget announcement may have a short
term positive impact on the sector on the back of delayed implementation of
GST reforms (VAT). The reforms envisage elimination of umbrella cover of
zero-rating regime for export oriented sectors (specifically textiles) and were
thus being anticipated to levy additional taxes on the sector.
For the rest of the sectors, budgetary announcements remain largely neutral.
Manufacturing sector however may bear marginal increase in cost of production
through increased FED on gas tariff and increased minimum wage rate. Higher
GST will result in an increase in retail prices for cements and FMCG products;
but are likely to be passed on to end consumer without denting the margins.
Increase in turnover tax to 1.0% (from 0.5% earlier) will however be negative for
companies posting losses on the back of excess depreciation and amortization
expenses.