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

Comments

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…
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.
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“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.
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“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.

[IMG]http://3.bp.blogspot.com/-aadV1TTyBo8/TwCuw8XlwsI/AAAAAAAACPo/0B8RXK_PiCc/s1600/KSE-BSE%2B2011.jpg[/IMG]

http://www.riazhaq.com/2011/12/pakistans-year-2011-in-review.html
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.


http://www.dailytimes.com.pk/default.asp?page=2012\04\14\story_14-4-2012_pg5_17

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