Karachi Stock Index Beat BRICs in 2010

Pakistan's main stock market ended 2010 with a 28 percent annual gain, driven by foreign buying mainly in the energy sector, despite concerns about the country's macroeconomic indicators after summer floods, according to Reuters. Although it was less than half of the 63% gain recorded in 2009, it is still an impressive rise in KSE-100 index when compared favorably with the performance of Mumbai(+17%) and Shanghai(-14.3%) key indexes. Among other BRICs, Brazil is up just 1% for the year, and the dollar-traded Russian RTS index rose 22% in the year, reaching a 16-month closing high of 1,769.57 on Tuesday, while the rouble-based MICEX is also up 22%.

Pakistan's key share index KSE-100 was just over 1000 points at the end of 1999, and it closed at 12022.46 on Dec 31, 2010, sgnificantly outperforming BRIC markets for the decade. Pakistan rupee remained quite stable at 60 rupees to a US dollar until 2008, slipping only recently to a range of 80-85 rupees to a dollar. In spite of the currency decline, Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms. During the same period of 1999-2009, Mumbai Sensex index moved from just over 5000 points to close at 17,464.81.

If you had invested $100 in KSE-100 stocks on Dec. 31, 1999, you'd have over $1000 today, while $100 invested in Mumbai's Sensex stocks would be worth about $400. Investment of $100 in emerging-market stocks in general on Dec. 31, 1999 would get you about $300 today, while $100 invested in the S&P500 would be essentially flat at $100 today.

The US Federal Reserve's current easy money policy, euphemistically called "quantitative easing", sent a torrent of US dollars flooding into the US, European and emerging markets around the world. All three major US stock indices rose in 2010. The Dow was up 1,149.46, or 11 percent. The S&P gained 142.54, or 12.8 percent. The Nasdaq ended higher by 383.72, or 16.9 percent.

Some of the US stimulus money found its way into India and Pakistan as well. The 28% gain in KSE-100 is driven in part by net foreign capital inflows of Rs. 43 billion ($515 million US dollars) in 2010. Similarly, global funds bought a net 6.05 billion rupees ($135 million) of Indian equities on Dec. 29, taking this year’s record flows into equities to 1.31 trillion rupees ($27 billion US dollars), according to data on the Securities and Exchange Board of India website. India's FII inflows surged 61 percent in 2010, making the gauge the most expensive in Asia and among the BRIC markets.

While China's situation is superior among the emerging markets, including BRICs, because it enjoys significant current account surpluses and has strong capital flow controls, it is also seeing its economy overheat along with India's economy. Joseph Stiglitz, a Nobel Laureate Columbia University economist, has argued that India is more vulnerable to an asset bubble than China, saying that “strong economies that don’t yet have capital control become the focal point” for the liquidity injected by the US Federal Reserve. Stiglitz thinks that India, more than China or Brazil, should watch out for the tidal wave of money made available from the Fed’s quantitative easing. Mike Shedlock, an American investment advisor, believes that "India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both".

Although the hot money does help to partially fund the growing current account deficits in both India and Pakistan, the net inflow of $515 million of FII in Pakistan is relatively small at 0.3% of its GDP, and it is less likely to impact the economy even if all of it goes away in 2011. In India's case, however, the $27 billion in FII represents a little over 2% of its GDP and its sudden flight out of India is a substantial risk for Indian economy.

In my opinion, the uncertain US and European economic recoveries and future monetary policy of the US Federal Reserve in 2011 and beyond represent the greatest source of instability for capital markets in the emerging nations such as India and Pakistan, which impose relatively lax controls on short-term capital flows.

Related Links:

Haq's Musings

Trade and Economy Indicators of 231 Countries

JS Global on Pakistani Stocks in 2010

Indian Economy's Hard Landing in 2011?

High Cost of Failure to Aid Flood Victims

Karachi Tops Mumbai in Stock Performance

India and Pakistan Contrasted in 2010

Pakistan's Decade 1999-2009

Musharraf's Economic Legacy

China's Trade and Investment in South Asia

India's Twin Deficits

Pakistan's Economy 2008-2010

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports


Riaz Haq said…
There is no question that the Indian economy is doing much better than Pakistani economy as Pakistan fnds itself mired in some serious crises.

BUt there is a patterns of some western magazines, probably inspired by their Indian staffers, that exaggerate India's accomplishments, while making Pakistan look worse than the reality warrants.

The latest example is data published by The Economist on India and Pakistan in its current issue.

It says the following about India:

GDP growth: 8.2%
GDP: $1,832bn (PPP: $4,508bn)
Inflation: 5.8%
Population: 1,202.1m
GDP per head: $1,520 (PPP: $3,750)

And Pakistan:

GDP growth: 3.2%
GDP: $188bn (PPP: $487bn)
Inflation: 9.9%
Population: 189.6m
GDP per head: $992 (PPP: $2,570)

Here are the problems with the above:

1. Pakitan's population is about 180 million, not 190 million as stated by the Economist. This distortion causes Pakistan's GDP to look smaller than it is.

2. India's GDP is not $1.8 trillion. The highest figure I have seen is $1.5 trillion. This exaggeration makes India's per capita GDP higher than reality.

3. The magazine puts India's inflation rate at 5.8%...the actual inflation rate in India is in double digits....wth the latest figures closer to 15%.

The fact is that, using credible data from multiple souces, the real per capita GDP of both India and Pakistan hovers a little over $1000 in nominal terms.

Isn't it shoddy journalism by the Economist?

What happened to fact-checking at the Economist magazine?

Aren't these figments of The Economist's Indian staffers' imagination?
Riaz Haq said…
Here's Pakistan's latest economic news in brief supplied by Foundation Securities Research:

The Ministry of Finance has agreed with the proposal of the Tax Reform Co-ordination Group (TRCG) to create a Fiscal Policy Board to be headed by the Finance Minister under the reform plan to exclusively deal with the fiscal policy and taxation issues under the umbrella of the proposed fiscal board. (BR)
The country's trade deficit soared to $8.149 billion in July-December 2010, 18.20 percent up over $6.89 billion for the same period of last year, according to the Federal Bureau of Statistics (FBS). Official trade figures released by the FBS here on Tuesday showed an increase in exports of 20.63 percent for the same period which analysts say could be largely because of per unit price increase instead of increase in the quantity. (BR)
Remittances sent home by overseas Pakistanis continued to show rising trend as $5,291.41 million was received in the first half of the current fiscal year 2010-11(July-December), showing an increase of $761.23 million, or 16.80 percent, when compared with $4,530.18 million received during the same period of last fiscal year. (BR)
The CPI inflation soared by 15.68 percent in December 2010 over the same period of last year with phenomenal increase in perishable food items, showing a strong trend of increase in prices of food items which may push more people below the poverty line. (BR)
Japan has queued up to help Pakistan to plug in widening budgetary gap by granting it $60 million soft loan in response to Islamabad's call to the friendly countries for financial support to keep current budget deficit at some reasonable level. (BR)
Another round of speculations came to an end on Tuesday when President Asif Ali Zardari issued a notification appointing a PPP stalwart and former Attorney General Sardar Latif Khan Khosa as Governor of Punjab. (BR)
The monthly Consumer Price Index (CPI) during the month of December registered a decrease of 0.31 per cent as compared to previous month of current financial year. (DAWN)
The government has decided to put a freeze on electricity tariff for the remaining period of the current fiscal year owing to its inflationary impact on economy and unending loadshedding, according to a senior official. (DAWN)
The Secretary Cabinet Division, Abdur Rauf Chaudhry on Tuesday said 3G services would hopefully be available to the Pakistani mobile users by the end of 2011 — while it was expected that the policy for auction of 3G services licenses would soon be presented to the government and Economic Coordination Committee (ECC) for discussion and approval. (DT)
The FBR has started to evaluate alternative proposals to replace the controversial RGST in case the government failed to get it approved from the parliament. (TN)
Despite receiving orders from the Ministry of Petroleum, OGDCL has not replaced one of its directors on board, who also works for a partner company. (TN)
NCCPL shows a net inflow of USD2.18 million.
Crude oil is trading at USD91.1 per barrel.
Riaz Haq said…
Here are excerpts from a Wall Street Journal Op Ed by Rupa Subramanya Dehejia on potential for India-Pakitan trade:

How does India fit into this picture? And can two nuclear-armed rivals with a fraught relationship meaningfully engage in trade and commerce with each other?

Trade is one of the engines of growth and development but in the case of Pakistan, this potentially important link with India is virtually missing. At present trade is roughly $2 billion a year.

Pakistan accounts for less than 1% of India’s trade and India less than 5% of Pakistan’s trade. Contrast this to the bilateral trade relationship following independence, when 70% of Pakistan’s trade was with India while more than 60% of India’s exports went to Pakistan.

According to Mohsin Khan of the Peterson Institute, economists estimate a “normal” trading relationship would be five to 10 times larger than the current amount.

There is also an estimated $2 billion to $3 billion a year in trade that takes place unofficially through third countries, especially the United Arab Emirates.

If this could be normalized as bilateral trade, it would occur at a much lower cost and therefore greater economic gain.

I’d argue that we must at least try to improve our economic relationship even if the political relationship is still frosty. The great exemplar here is the European Union, which was built on the premise that binding neighbors together economically was a prerequisite for ensuring peace and prosperity for all. We in India have yet to fully absorb this lesson. A prosperous Pakistan will not only be good for Pakistanis themselves but also good for us in India.

It’s time for the liberal commentators on both sides of the border to stop wringing their hands about the demise of a secular liberal democracy, because Pakistan hasn’t been that for some time, if it ever was.

While the support that the Indian intelligentsia has offered their counterparts in Pakistan following the assassination is heart-warming, it’s not consequential in the big picture. Liberals in Pakistan may fight on but it’s time for us in India to accept that Pakistan is an Islamic state with Islamic values and laws.

The crux here is that trade and commerce know no religious boundaries. We must work towards building a stronger bilateral relationship on that basis.
Riaz Haq said…
Here's an interesting assessment of "Why Foreigners Are Buying" by a Pakistani poster on Pakinvestorguide.com:

The aftermaths of the 2008 debacle had been; depleting
foreign reserves caused by a higher twin deficit and in turn,
higher inflation leading to substantial Rupee depreciation.
Relatively speaking, in the present, Pakistan’s reserves are
strengthening; the current account is under control led by
commodity price pass through and a stable real effective
exchange rate, and the global economic outlook is recovering
from its worst. This is also reflected from the recent growing
foreign interest in the local equity bourse, where foreigners
have invested around US$566mn in FY10, highest since the
record US$978mn worth of funds flowed into the KSE in

Why are foreigners buying?
As stated in our research report- Foreigners regaining
position at the KSE; dated: 20 Sep 2010 - foreigners own
one-third of Pakistan’s equity free float and accounted for
32.86% of the total traded value at the bourse. The all time
high level of foreign ownership witnessed last was 28.22% in
November 2007. To us, the reasons behind the foreign
interest in 2007 and 2010 are entirely opposite:

2007: The economy was overheating, liquidity was abundant,
reserves were stabilizing and the global funds were in search
of better yields. Hence the preferred sector at that time was
Sector of main interest: The banking scrips comprised over
31% of the KSE’s market pie.

2010: Stagflation is over and the economy is in recovery
mode, external discipline has been revived, food and fuel
subsides have been withdrawn, an economic reformation
process backed by the IMF is in place and more importantly,
the US has emerged as the strong ally. The higher external
support is a prime source of comfort for the foreigners this
time around.
Sector of main interest: Oil and Gas share has grown to 36%
of the KSE’s total market capitalization.

FY10 and FY07 comparison
(US$bn) FY10 FY07
Foreign inflows 0 .6 1.0
Inflation 11.7% 7.8%
GDP growth 4.1% 6.8%
Fiscal Deficit 6.3% 4.3%
C/A Deficit 3 .5 6.9
Reserves 16.8 15.6
Exchange Rate 85.5 60.4
Discount Rate 12.5% 9.5%
P/E (X) 8.5 13.2
Market Cap 3 2.0 66.5
Banking sector weight 23.0% 31.0%
Oil & Gas sector weight 36.0% 24.0%
Source: Economic Survey of Pakistan, SBP & JS Research

Why locals are sellers?
The lack of liquidity, non-availability of financing options, the
banks’ risk-averse attitude towards stock investors and
imposition of capital gain tax have been deterring local
participation. Add to that, the federal decision of keeping the
SBP Governor’s position vacant for 3 months, non
appointment of the SECP chairman and having had four
different finance ministers within a short span of 30 months.
And if that were not enough, the recent wide scale floods,
increasing price pressures and the persisting inter-corporate
debt have heavily weighed in on the minds of the locals
encouraging their selling spree.
Riaz Haq said…
Here's a Tribune Express report on Karachi shares 2010 performance:

KARACHI: The Karachi Stock Exchange (KSE) witnessed the traditional year-end rally to give a cheerful farewell to 2010. Despite late selling on the last trading day of the year, KSE-100 index registered an increase of 1.4 per cent to end the outgoing year at 12,022 points – its highest since July 2008.

Overall, the benchmark index provided returns of about 28 per cent year-on-year.

Foreign inflows for the week clocked in at higher levels with the net amount standing at $12.2 million, compared with just $5.5 million in the preceding week. The net inflow of foreign investments for the year tallied at an impressive $526 million.

United Bank Limited (UBL) and Fauji Fertiliser Company (FFC) dominated discussions at the bourse during the week. Bestway Group’s acquisition of an additional 20 per cent stake in the bank encouraged positivity amongst investors, as did the disbursement of $633 million to the country as part of the Coalition Support Fund from the United States.

FFC’s stock ticker continued to rise despite an explanation call issued by the government to fertiliser companies over the increase in the price of fertiliser.

Although the market did not immediately respond positively to the International Monetary Fund’s nine-month extension for meeting conditions attached to the standby arrangement, the decision eased uncertainty on the political front to some extent.

Market activity during the week was heavily concentrated in blue-chip stocks, particularly from the energy sector as investors took cue from rising international oil prices. “Despite political noise, the oil and gas sector along with the banking sector stole the show at the bourse during the week,” read a KASB research report.

While the index ended the year at its highest level since July 2008, market volumes told a different tale. Average daily volumes were down 30 per cent compared with 2009, standing at a meagre average of 121 million shares.

What to expect this year?

InvestCap analyst Imran Safdar termed the immediate outlook for equity prices ‘neutral’, citing the tug of war on the political front, coupled with the silver lining of earnings growth and economic recovery.

“With the election of new directors at the exchange, a new round of negotiations on the leverage product may start and any positive outcomes should drive the index up,” stressed analyst Imtiaz Gadar in a research report. The report also termed the commencement of trial operations at Engro’s new urea plant positive for future trade sessions at the bourse.

After a difficult year, analysts maintain a positive view on the market on the back of foreign inflows, strong growth in earnings, potential introduction of a leverage product and post-flood reconstruction activities.

Nonetheless, it is important to note that higher-than-anticipated commodity prices and discontinuation of the IMF programme remain key risks.
Riaz Haq said…
Pakistan Attractive as Growth Outweighs Violence, Atlas tells Bloomberg:

---“I really don’t spend any time worrying about law and order,” said Muhammad Abdul Samad, 40, who oversees $77 million in Pakistani stocks and bonds as chief investment officer at Atlas Asset in Karachi. “If you want to make returns, you have to look at the positives: we have a huge market of 180 million people and the economy is still growing.”

Gains in National Refinery Ltd. (NRL), the second-biggest oil processor, and Attock Petroleum Ltd. (APL), a fuel retailer, boosted Atlas’s top fund in the year ended June, Samad said. For the fiscal year starting July, it’s seeking investments in banks, oil and gas, and fertilizer industries, he said.

Pakistan’s benchmark stock index, which trades at 6.4 times estimated earnings, the lowest in Asia, has fallen 9 percent since the end of June as escalating violence hurt business confidence. Prime Minister Yousuf Raza Gilani’s government aims to boost economic growth to 4.2 percent in the year to June 30, 2012, from 2.4 percent in the previous 12 months.
“Selling from foreign portfolio investors is affecting the local market,” Samad said.

Last year, global funds bought $344 million worth of Pakistani stocks compared with net sales of $65 million, according to central bank data. More than 35,000 Pakistanis have been killed in terrorist attacks since 2006 as Taliban militants retaliate against military offensives in the northwest, according to the government.

Samad’s 650 million rupee ($7.5 million) Atlas Stock Market Fund outperformed all Pakistan’s 30 equity funds, according to Invest Capital Markets Ltd. The fund returned 40 percent in the 12 months ended June 30 and beat the 29 percent return of the benchmark Karachi Stock Exchange 100 Index.

His top five holdings as of June 30 were Nishat Mills Ltd., MCB Bank Ltd., Pakistan Oilfields Ltd., United Bank Ltd. and Allied Bank Ltd.

“Banks are going to post attractive earnings because if interest rates come down, they will lend more to the private sector and if they don’t, they will invest in high-yielding government securities,” said Samad, adding that the three banks are among his top picks this fiscal year. “Banks are in a comfortable position either way.”

Pakistan’s central bank unexpectedly cut the benchmark interest rate to 13.5 percent on July 30, after holding it at 14 percent, one of the world’s highest, for four straight reviews.

In the oil and gas sector, Samad likes Pakistan Oilfields, Pakistan Petroleum Ltd., and Attock Petroleum. Pakistan, which imports 80 percent of its fuel needs, is increasing production to reduce reliance on shipments from overseas. He also favors Fauji Fertilizer Ltd., the biggest urea maker, and Fauji Fertilizer Bin Qasim Ltd. (FFBL), a fertilizer producer.
“Active fund management, timely investment and divestment, as well as the performance of some stocks like Attock Petroleum were main reasons for Atlas’s outperformance,” said Mazhar Sabir, an analyst at Invest Capital Markets in Karachi.

Samad said Atlas may introduce a government bond fund this year targeting investments of three to five years and is considering a dividend-yield equity fund and a sector-specific stock fund next year.

“In the short run, law and order problems definitely hurt investors,” Samad said. “But in the long run, there’s no impact. And we’re here for the long run.”
Riaz Haq said…
Pakistan's key share index KSE-100 dropped about 5% in 2011, significantly less than most the emerging markets around the world. Mumbai's Sensex, by contrast, lost about 25% of its value, putting it among the worst performing markets in the world.


Riaz Haq said…
Here's a Daily Times report on IFI holdings of Pakistani shares:

Foreigners remained aggressive in Pakistan’s oil and gas sector as they continued to own more than 500 million shares ($950 million) in Oil and Gas Development Company (OGDC) and approximately 120 million shares ($250 million) of Pakistan Petroleum Ltd (PPL), which represent 83 percent and 45 percent of free float of OGDC and PPL, respectively. This is primarily due to higher oil prices and decent volumetric growth. Similarly, their shareholding in Pakistan State Oil (PSO) and Pakistan Oilfields (POL) is expected to remain almost the same. Thus out of $2.7 billion worth of stocks that foreigners hold (as of March to December 2011), approximately 50 percent of the foreign shareholding is only concentrated in oil sector, including which OGDC alone contributes 35 percent.
Interestingly, foreigners which own every third Pakistani share of free-float, have been net buyers of $11 million so far in CY2012 primarily due to record inflows in regional markets amid improved risk appetite and better global economic data. Last year due to depressed global markets, foreign participants offloaded their positions in Pakistan liquidating $123 million net in 2011 contrary to net buying of $526 million in 2010. However, thanks to continued interest in Pakistan market, foreigners now hold shares valuing $2.7 billion as of March 30, 2012 (28 percent of free float). Their peak holding was $5.1 billion (27 percent of free float) in April 2008 and lowest was $1 billion (17 percent of free float) in March 2009.
Estimated holdings of foreigners in Pakistan key stocks are OGDC $950 million, MCB $250 million, PPL $250 million, UBL $135 million, Lucky Cement $135 million, FFC $125 million, Unilever $100 million, POL $75 million, Hubco $65 million, NBP $50 million, Engro $35 million, Nestle $35 million, PSO $25 million and DGK Cement $20 million.

Riaz Haq said…
Here's a NY Times on soaring stock market in Karachi, Pakistan:

If the best time to buy, as the old business adage says, is when there is blood on the streets, then Pakistan’s commercial capital, Karachi, offers the ideal investment opportunity.

For more than a decade, the sprawling seaport megalopolis of about 20 million people has been racked by political, militant and criminal violence that has taken thousands of lives. Yet, over the same period, the city stock market, which is also Pakistan’s main exchange, has posted spectacular results.

Over the past 12 months alone, the Karachi Stock Exchange has surged more than 44 percent, placing it among the world’s top-performing stock markets in dollar terms this year, according to Bloomberg.

That follows a decade of growth in which one dollar invested in an index fund of Pakistani stocks 10 years ago would have earned, on average, 26 percent every year, analysts say, in a period otherwise notable mostly for bad news. As the stock market rose, the Pakistani military leader Gen. Pervez Musharraf fell, Osama bin Laden was captured and Taliban violence spread from the northwest to cities across the country, including Karachi.

Just as surprising, perhaps, Wall Street firms are driving the latest phase of the stock boom. Bad news can make for a good bargain, they say.

“What you see in the popular press is just one part of the picture,” said Mark Mobius, a fund manager at Franklin Templeton Investments, which has more than $1 billion invested in Pakistan stocks, mostly in the energy sector. “There’s another side to these countries, where life goes on. And that’s what we focus on.”

The gloomy image of Pakistan obscures positive aspects of its economy that, investors say, make some companies an attractive bet. Beyond the headline news, much of the country is getting on with normal life. And with a population estimated at nearly 200 million people — a high proportion of them young — Pakistan offers a large, lucrative market for consumer goods, construction and financial services firms, which constitute the bulk of the Karachi stock market.

The biggest publicly listed companies — like the multinational NestlĂ©, the Oil and Gas Development Company and Fauji Fertilizer, a military-run conglomerate — pay handsome dividends, which makes them attractive to foreign investors.

And the recent election victory of Prime Minister Nawaz Sharif, a business tycoon, has injected confidence into the financial community, which had been wary of the previous government.

For a time, Pakistani stocks were undervalued by as much as 50 percent to account for risk, compared with a regional discount of about 20 percent, said Taha Javed, a financial analyst in Karachi. Now, as foreign investors pile in, he said, “we are catching up.”...


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