Will Foreign Capital Inflows Buoy KSE-100 in 2011?

"The bottom line is that Pakistan is not going to go away. We want to buy stocks that look cheap as prices come down as a result of the flood."
Mark Mobius, Head, Templeton Asset Management Ltd

Pakistan's main shares index KSE-100 rose 28% (26% in US dollar terms) in year 2010, as profits registered 14% growth and dividend yields of 5.2% in the companies making up the index.

The market gains were driven by significant foreign buying, particularly by insitutional investors after the massive summer floods in KP, Punjab and Sindh provinces. Foreign institutional investors bought $1.2 billion worth of shares, and sold about $687 million, with the net FII capital inflow of $522 million during the year. One example of renewed foreign institutional buying after the post-floods market is Mark Mobius of the Templeton Asset Management Ltd, as reported by Businessweek. “There will be an impact on growth but company valuations are very, very attractive now and therefore we continue to invest in Pakistan despite all the negatives,” Mobius said in an interview in Singapore. “The bottom line is that Pakistan is not going to go away. We want to buy stocks that look cheap as prices come down as a result of the flood.”

As of Dec 31, 2010, Mobius had 4.8% of his $17 billion Templeton Asian Growth Fund invested in Pakistan.

The highest performing sectors were food and beverage (65%), oil and gas (40%), chemicals (30%) and personal goods(20%). These were followed by smaller gains in electricity, fixed-line telecom, automobiles, and construction materials, according to JS Global research. Oil and gas shares now make up 36% of KSE's total marke cap, a major shift from 2007 when financial services made up 31% of the Karachi Stock Exchange market cap of about $40 billion.

Even with lower than historic average gains in a challenging year, KSE-100 easily beat 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%.

After the 26% gain in 2010, the KSE-100 shares still trade at PE ratio of just 8, significantly discounted relative to KSE's historic price-earnings multiple of 10, and other regional markets of Shanghai and Manila at 15, and Mumbai at about 20.

While the big interest rate hikes by Pakistan's central bank (SBP) to fight inflation have dramatically reduced liquidity for local investors, the massive economic stimulus (aka quantative easing policy to jumpstart the US economy) by the US Federal Reserve has unleashed a torrent of US dollars looking globally for good returns on investment. This is likely to continue to push shares in the emerging markets higher through at least 2011.

The problem with the foreign institutional investment (FII) is that it can be very destabilizing for an emerging economy. It is often described as hot money, and it can leave as quickly as it comes in. 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.

In Pakistan's case, however, the amount of FII has so far been very small relative to its market capitalization and the size of the country's GDP. If foreign portfolio investment dollars continue to come in at the same or even a bit higher rate in 2011 as they did last year, it will likely result in a healthy situation in providing necessary liquidity and help push the market up again this year.

Other factors that will the affect the KSE market performance this year include:

1. Continued rise in exports, overseas Pakistanis' remittances, and other inflows for a healthy current account balance which ended in surplus of $26 million in 2010.

2. Enhanced domestic liquidity expected from the launch of new leveraged financial products in 2011.

3. Movement toward better manangement of the energy crisis leading to fewer blackouts and brownouts.

4. Progress on balancing the budget, with better tax collection and higher tax receipts in 2011.

5. Implementation of the IMF program, stabilization of prices, reduction in interest rates, and rising foreign exchange reserves.

6. Improvement in the overall security situation with perceptible reduction in violence.

Here's a video on how to invest in Pakistan:

Related Links:

Haq's Musings

Pakistan's 2010-2011 Budget Priorities

Pakistan's Exports and Remittances Rise to New Highs

Pakistan's KSE Outperforms BRIC Exchanges in 2010

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

Copper, Gold Deposits Worth $500 Billion at Reko Diq, Pakistan

China's Trade and Investment in South Asia

India's Twin Deficits

Pakistan's Economy 2008-2010


Riaz Haq said…
Here's the Daily Times stocks report for week ending Jan 29, 2011:

KARACHI: The Karachi stock market managed to close in the green zone on weekly basis due to strong results announcements, analysts said on Saturday.

The gains would have been a bit more but all eyes were on the monetary policy announcement where expectations of another 50 basis points hike in the policy rate led the investors to book profits during the week, they added. The Karachi Stock Exchange (KSE) 100-share index gained 30.79 points or 0.24 percent to close at 12,462.70 points as compared to 12,431.91 points of the previous week.

“The market started the week under pressure, as the first trading day of the week saw the 100-share index lose 61 points to 12,371 points,” said Invest Capital analyst Asad Siddiqui. “However, from the very next day positive movement was seen, but it remained range-bound between 12,446 points and 12,483 points.” The week saw good results coming in from the fertilizer and refinery sectors, however, the market volumes remained very low as average daily volumes stood at 117 million shares, taking a significant fall of 50 percent.

However, tax collections are yet to catch up with the target levels. Conversely, expectations by the country’s fiscal authorities for the fiscal deficit going beyond 8.0 percent and another cut in the development budget of the country by Rs 100 billion from the government, were a few concerns to watch out for. On foreign inflow front, the week witnessed a massive 57 percent decline to only $6.3 million.

The market turnover went down by 56.60 percent trading 87.90 million shares as against 202.58 million shares of the previous week. The overall market capitalisation increased by 0.17 percent and closed at Rs 3.369 trillion. JS Research analyst Sana Hanif, “All eyes were on the monetary policy announcement where expectations of another 50 basis points hike in the policy rate led the investors to book profits during the week.”

The multilateral donors have reportedly halted budgetary support to Pakistan and have asked the government to obtain an LOC from the International Monetary Fund.

However, on a positive note, provisional tax collection figures for 7MFY11 stood at Rs 747 billion, up 12 percent. Similarly, foreign reserves as of the week ending January 22 stood at a fresh high
of $17.3billion.

During the outgoing week, all key sectors including banks, oil and gas and telecom ended as under-performers. Autos too remained under pressure post federal cabinet’s approval of increasing the age limit of imported cars up to five years. Moreover, despite healthy results reported by two leading fertilizer makers and rise in DAP prices by Rs 100 per bag announced by Engro, investors chose to book profits in key fertilizer stocks.

Foreigners were net buyers of $6.3 million and individuals were the major net sellers, worth $7.7 million.
Riaz Haq said…
Here's an interesting analysis of potential risks in Pakistan's stock market by Dilawar Husain of Dawn:

KARACHI, Jan 10: The more-trusted KSE-100 share index is not the right representative of the 641 companies listed on the exchange. Only one stock–the energy sector bellwether, Oil & Gas Development Company (OGDC), can turn the market topsy turvy. With 25 per cent weight in the index and 82 per cent of the free-float in the hands of foreign investors, the direction of the entire market is at the mercy of Franklin Templeton Investments, which is understood to hold the biggest stake of 400 million of the 648 million free float of the energy giant—almost 80 per cent of all shares held by overseas investors.

Dr Joseph Mark Mobius oversees more than 40 emerging market mutual funds, including the Asia Growth Fund that carries OGDC on its books.

If the elderly investment guru (Mobius turned 74 last summer) changes his mind on the energy sector prospects in Asia, which he firmly holds to be exceedingly bright and instead seek an exit, the move would have devastating impact on the KSE.

OGDC stock price has scarcely looked down since it began climb in early 2007, the price of the 10-rupee share now rules at Rs178. That is at least Rs40 higher than the “fair price” tagged by most analysts at the start of 2010.

On Monday, the KSE-100 index pulled back 82.34 points. With OGDC down by Rs2.71, as many as 68 points to the decline were contributed by the share alone. How one mighty stock can overwhelm the rest of the market is clearly demonstrated by the OGDC performance in the outgoing year.

Farhan Mahmood, analyst at brokerage Topline Securities, tracks the energy sector. He observes that due to the huge size and limited float with the local investors, it is relatively easy to push the heavy-weight one way or the other.

“In the 2010 KSE gains of 28 per cent, as much as 12 per cent were added by the OGDC,” says Farhan. The stock continues to cast its spell well into 2011, since 167 points of the 367 points rise in the first six trading sessions are the blessings of the heavyweight energy stock.

Largely corned, OGDC has dropped to 16th place among the most tradable stocks at the KSE with average daily volume of only Rs119 million ($1.4million) during the first six trading sessions of the new year. Out of total $3 billion worth Pakistan equity held by foreigners, 33 per cent was estimated by Topline to be invested in OGDC. The market capitalisation of OGDC on Monday amounted to $9 billion, which made up as much as quarter of aggregate market value of 641 listed companies at Rs3.3 trillion or $89 billion (should be $39 billion?).

Many traders defend the rise of OGDC as a choice scrip due to its healthy yield, larger free-float and above all state-controlled majority holding. But all of it is as long as going is good. Since Beginning of 2010, OGDC has contributed approximately 1300 points to the staggering 3000 points rise in KSE-100 Index, which currently is staggering at the dizzy height of 12,307 points. Is it the time to fear and read the mind of Dr. Mark Mobius? In case the foreigners decided to wander away into other markets, the local bourse should spiral downwards to a steep drop. This time nonetheless, the government has the means to plug the hole and calm the market: It has simply to float another five per cent from its majority stake into the market.
Riaz Haq said…
Swedish trade mininster says Swdedes want to expand investments in Pakistan, according to news reports:

Swedish Minister for Trade Ms. Ewa Bjorling said on Wednesday that a good number of Swedish companies were already working in Pakistan and more companies were interested to start business ventures.

She said in a meeting here with Islamabad Chamber of Commerce and Industry (ICCI) for the promotion of two-way trade between Pakistan and Sweden.

She said that she had meetings with Prime Minister of Pakistan and other government officials and discussed the possibilities of more cooperation between the countries.

She said that Tetra Pack has presence in Pakistan for the last several years, and it has set up a new plant in Pakistan. She said that Swedish Trade Council is responsible for trade between both the countries and hoped for great business prospects in the fields of common interest.

Fredrik Fexe, Vice President of Export Radet, a Swedish Trade Council said that Pakistan is large consumer market. He identified telecom, energy, environmental technology, water purification, waste management, automobiles, healthcare, and supply of construction equipment for having trading, investments and joint ventures with the Pakistani companies.

Charlotte Kalin, Vice President of the Stockholm Chamber of Commerce and Industry informed that three Swedish delegations visited Pakistan last year and current delegation was quite optimistic of good business prospects here.

Mahfooz Elahi, ICCI President, thanked the Trade Minister for bringing a trade delegation for building trade and investment relations with Pakistani companies.

He said that Swedish companies including Panasian, Volvo, Ericson, Sabba, Tatra Pak, Skanska, Wah Nobel, H&M, Ikea and Atlas Packages Limited are operating successfully in Pakistan and said that more Swedish should invest in hydro power projects, dams, tunnels, infrastructure development, food and beverages and dairy and milk products.

Mahfooz Elahi said that perception about good image of Pakistan is needed to be improved to encourage foreign investor to invest in the country.
Riaz Haq said…
Indian stocks were driven by foreign buying in 2010, in spite of net domestuc selling, according to The Hindu:

Mumbai, Dec. 31 Year 2010 saw foreign institutional investors buy Indian stocks for $29 billion net. This is the most that they have pumped into the Indian market in a single year despite the market-indices here being fairly range-bound during this period.

This is also much more than the inflows ($17.6 billion) seen in 2007, when the Sensex was on a gaining streak.

The markets did surge a little in 2009, too, when FIIs were net buyers for a total of $17.45 billion.

Domestic institutions, on the other hand, were net sellers of equities for Rs 19,503 crore in calendar 2010.

FIIs were also net buyers in equities in all months this calendar, except in January and May. August saw the highest net purchases in a single month this year for $13 billion.

On a year-to-date-basis, the Sensex and the Nifty returned 15 per cent and 16 per cent, respectively.

It was this relentless buying from the FIIs that pushed up the Indian markets in 2010.

Though the Sensex did reach an all-time high this year, it was quite range-bound. The benchmark has been trading between 17,000 points and 21,000 points right through 2010.


The buying spree on the part of FIIs slowed down in the last month amidst all the scams and the routine FII year-end exits when they need to pay their investors. Their net purchases during December has so far amounted to $0.3 billion only.

“Part of this pullback is because India is perceived to be overvalued vis-a-vis other emerging markets.

“Indian markets have enjoyed around a 30 per cent premium to the other emerging markets. But what has happened this year is that the scams have made FIIs start to question the rich valuations here,” said Mr Saurabh Mukherjea, Head of Equity at Ambit Capital. He added that the next year might see a moderation in FII inflows into the country.

Domestic institutions were net buyers of equity during December and November after being net sellers for five consecutive weeks. Mr Mukherjea said that insurance companies have been seeing inflows trickling in during December and that the fund houses here are also in “slightly better health”.

Mr K. Ramanathan, Chief Investment Officer at ING Investment Management, said that mutual funds faced a lot of redemptions this year and they did not get much incremental net inflows.

“The changes in the regulatory framework too hurt the mutual fund industry. Distributors find it better to sell insurance products as the brokerage there is better than from distribution of mutual funds,” he added.
Riaz Haq said…
Here's an interesting assessment of Pakistan's economy in 2H-2010:

...“The country’s exports, money sent by overseas Pakistanis, balance-of-payments position and foreign exchange reserves have reflected an encouraging growth during July-December FY11, showing strong signs of improvement in the economy,” Saad-bin-Naseer, CEO of Pearl Capital, told Central Asia Online January 28. Pakistan’s exports were $10.97 billion, an increase of US $1.88 billion, in the first six months of FY11.

That 21% increase was a very positive sign for the growth of export-oriented industry and the national economy, he said.

In FY11 exports could cross the $22 billion mark for the first time because of a significant increase in the value of Pakistani products on world markets, Naseer added.

“The textile industry had taken the lead by fetching $1.28 billion in additional foreign exchange through exports,” Anisul Haq, secretary of All Pakistan Textile Mills, told Central Asia Online.“The textile industry had taken the lead by fetching $1.28 billion in additional foreign exchange through exports,” Anisul Haq, secretary of All Pakistan Textile Mills, told Central Asia Online by telephone from Lahore. “From July-December FY11 textile exports increased to $6.28 billion” compared to 2010 figures.

Total annual textile exports could exceed $13 billion for the first time, he added. In 2009-10, they totalled $10.5 billion.
“The textile industry had taken the lead by fetching $1.28 billion in additional foreign exchange through exports,” Anisul Haq, secretary of All Pakistan Textile Mills, told Central Asia Online.
Another pillar of the economy is remittances from overseas Pakistanis. The money they sent home increased by $780m in the first half of FY11, to $5.3 billion, Haq said.

“We hope the country would receive $11 billion from overseas Pakistanis in 2010-11 with major increase in inflows from Pakistanis staying in Arab countries and other western countries,” Haq said.

Foreign aid from institutions and countries, not just individuals, helped. The disbursement of $633m in coalition support and the extension that the IMF gave the government for imposing the Reformed General Sales Tax (RGST) helped improve some of the major economic indicators, Naseer said.

The picture did much to bolster Pakistan’s balance sheet, which has had its ups and downs. Pakistan recorded a current account surplus in the first six months of the fiscal year, which enabled growth in foreign exchange reserves and stabilised the dollar-rupee exchange rate, Pearl Capital’s Naseer added.

In 2009-10, the country incurred a $2.5 billion current account deficit from July-December, but for the same period in 2010-11 it enjoyed a surplus of $26m – a dazzling switch from red ink to black, he said.

The robust performance of exports and remittances enabled Pakistan to accrue a record $17.3 billion in foreign exchange reserves by January 21, he said.

Investor confidence has grown in response to these positive indicators. The stock market capitalisation grew to $36 billion in January 2011 from $32 billion in October 2010, he said, adding that such growth would encourage foreign and local investment.

Islamabad, which still hasn’t imposed the RGST the IMF wants, doesn’t collect enough taxes, Khan said. It levies only about 9% of GDP against the required international standard of a minimum 15% tax-to-GDP ratio, Khan said.

The government must implement tax reform, reduce reliance on borrowing from the IMF and generate its own resources to enhance tax revenues and to bolster economic growth, he added.

Serious efforts to solve chronic gas and power shortages are also imperative, he said.
Riaz Haq said…
Karachi stocks rose 777 points on hopes of launch of margin trading system, according to Daily Times:

KARACHI: The Karachi stock market observed a bullish trading week as the expectations of launch of Margin Trading System boosted investors' confidence, analysts said on Saturday.

Analysts said investors went for buying activity as political uncertainty waned out after local petroleum prices were rationalized, while rise in global commodity prices, Brent crude oil above $115 and renewed foreign interest in blue chips also contributed to the bullish trend.

The Karachi Stock Exchange (KSE) 100-share index gained 777 points or 6.9 percent to close at 12,000 points as compared to 11,223.52 points of the previous trading week.

"The expected launch of MTS elevated investor sentiment in the outgoing week as the 100-share index registered a massive gain," said JS Research analyst Rabia Tariq. "Volumes too gathered pace."

The corporate result season nears its conclusion with NBP, BAFL, NCL and PSMC being major scrips announcing their earnings. Moreover, SBP released the fiscal account details, with the deficit widening to 2.9 percent of the gross domestic product in the first half of FY11.

NBP astonished investors by announcing a higher-than-expected cash payout of Rs 7.5 per share and a stock dividend of 25 percent, along with earnings of Rs 17.6 billion (earning per share Rs 13.05) in 2010, flat on yearly basis. Resultantly, the stock rose 20 percent during the week.

Moreover, banking spreads data revealed average industry spreads rising by 32 basis points on yearly basis to 7.57 percent, keeping the sector in limelight as it outperformed the index by 5.0 percent.

NCL too announced its 1H FY11 profit after tax of Rs 518.9 million (EPS Rs 3.21), up 270 percent owing to hefty margins in the spinning segment. Going forward, due to favourable earnings outlook for the company, investors continued to exhibit keen interest in the scrip, reflected by a 16.5 percent rise on weekly basis.

Pakistan's fiscal deficit climbed to 2.9 percent of the GDP during 1H FY11, up from 2.7 percent of the GDP in the corresponding period last year.

Keeping in mind the recent spike in international oil prices and government of Pakistan reversing its decision on POL prices by half, the deficit may be burdened further. Also, International Monetary Fund and the government talks relating to the pending 5th review restarted this week, and are likely to gather momentum in the coming days.

Foreigners concluded to be net buyers of worth $2.9 million.

The market turnover went up by 19.54 percent trading 187.49 million shares as against 156.83 million shares of the previous week.

"Bullish activity was witnessed in scrips across-the-board ahead of the launch of MTS on Saturday by the finance minister," said Arif Habib Investment Ltd Director Ahsan Mehanti.
Riaz Haq said…
Here's a Business Recorder report on threats from inflation and capital inflows in Asia:

ISLAMABAD: Inflation has become or continues to be an important risk to macroeconomic and social stability in a number of countries in Asia Pacific, including Vietnam, Sri Lanka, India, Indonesia, Mongolia, Cambodia, Cook Islands, Fiji, Pakistan, and Bangladesh.

This was revealed in a report titled "Asia-Pacific Sovereigns In 2011: Generally Stable Credit Quality; Inflation, Capital Flows Make Policy Environment Tricky.

Issued by the Standard & Poor's Ratings Services, the report said the challenges of strong capital inflows and rising inflationary pressures bring in important credit risks. Domestic politics and increasing geopolitical risks further complicate policy decisions, it said.

The ability of Asia-Pacific governments to navigate external and domestic challenges adroitly while pushing ahead with economic reforms will determine the pace of ascent in their credit ratings.

"In our base-case scenario, strong growth will support credit quality in Asia-Pacific," said Standard & Poor's credit analyst Elena Okorotchenko Asia continues to outperform other regions in terms of growth and sovereign credit trends.

The report said, despite generally stable credit quality, various factors have combined to make the policy environment tricky for sovereigns in the region, said in a report available here Monday.

Economic growth will enable the public sector of high-income economies to reduce fiscal deficits and resume fiscal consolidation and allow emerging market governments to speed up structural reforms.

But the downside risks to this scenario are growing beyond just a slower U.S. economy or the eurozone debt woes.

Food and energy price increases, the familiar bugbears, are providing a strong inflationary impetus across the board, and present low-income sovereigns in particular with difficult political and fiscal choices.

In addition to inflation, a number of sovereigns, such as Indonesia, Thailand, and Korea, could be facing problems with capital flows, either as a result of large inflows/outflows complicating exchange rate management or because of potential policy mistakes in trying to control such flows.

Recent developments in several Middle Eastern countries have raised questions about contagion effects.

Such popular uprisings are highly unpredictable, although the risks appear to be more pronounced where high unemployment among the young, inflation, poverty or wide income gaps are combined with growing political disillusionment in an autocratic and often corrupt regime.

In Asia, there are countries with ongoing political/social tensions and risks independent of recent events in the Middle East: Fiji, Pakistan, Bangladesh, and Thailand.

"We have factored these risks into current ratings on these sovereigns," said Ms. Okorotchenko.

In a number of other countries, the risk of social unrest is present but mitigating factors are currently strong. These are China, Vietnam, Sri Lanka, Malaysia, and Cambodia.

"The risks in these countries are mitigated by some combination of strong growth, low unemployment, and a degree of popular support for the government," she added.

Of the 22 sovereigns that Standard & Poor's rates in the region, 17 have stable outlooks on their ratings. Indonesia and Fiji have a positive outlook, and only three sovereign ratings are on negative outlooks: New Zealand, Vietnam, and the Cook Islands.
Riaz Haq said…
Pakistan's ministry of finance is projecting 4% growth in fiscal 2011-12, according to The News:

“We are looking at a growth rate of four percent for the next year because of a good services sector and on the hope of better farm output,” said a Finance Ministry official who did not want to be identified.

The figure compares with a 3.7 percent growth forecast by the Asian Development Bank (ADB) in its Outlook 2011 report released on Wednesday.

The ADB expects persistent energy problems and security issues will continue to check Pakistan’s growth in 2011/12, with surging inflation posing a further major risk.
Last year, the worst-ever floods that hit the country inflicted $10 billion in losses, forcing officials to slash growth estimates in between 2.5-3 percent for the current year, down from an expected 4.5 percent.

The services sector, however, is likely to grow by four percent in the current year to June and there are signs that the farm sector is recovering from the flooding.
Higher cotton, rice and sugar output is expected in the coming year, analysts said.

“We expect that 2011/12 will be much better than this year ... Our own (growth) forecast is close to 4.5 percent,” said Sayem Ali, an economist at the Standard Chartered Bank.

An official at the Planning Commission, which prepares growth targets, also spoke of likely four percent growth next year, but said that was contingent on continuing support from remittances from Pakistanis working abroad and on exports, which have grown by 20-25 percent during the first eight months of the current financial year.

However, the large-scale manufacturing sector, which dominates the overall industry making up 12.2 percent of Pakistan’s GDP, remains a major concern as it faces chronic energy shortages and high interest rates that discourage private sector borrowing.

The sector grew 1.03 percent up to January, against 2.34 percent during the corresponding period last year.

“Energy shortfalls are lowering real growth by at least two percentage points annually,” the ADB said in its report.

Improved prospects for Pakistan’s economy, however, will largely depend on the implementation of measures to address key problems such as inflation, the budget deficit and the need for transparent revenue policies, according to the ADB.

“Increasing prices are on the warning level, not just for Pakistan, but for the whole region,” said Rune Stroem, ADB’s Pakistan country director.

The ADB forecasts inflation in Pakistan will quicken to 16 percent in 2011, the highest in Asia. Revenue generation is another grey area.

The central bank chief said this week that quick steps were needed to broaden the tax base in Pakistan, which has one of the lowest tax-to-GDP ratios in the world, currently around 10 percent.

The IMF has not yet released the latest tranche of the $11 billion loan due in May last year because of the government’s inability to implement a reformed general sales tax, seen as a key to expanding the tax base.

The fiscal deficit, meanwhile, is expected in between 5.3 percent and 5.5 percent of the GDP in 2010/11, but could be higher if some external flows, including grants, are not received soon.

Stroem said that 5.5 percent deficit estimates seemed unrealistic and there are signals that these might slip even further.
Riaz Haq said…
Pak Suzuki Motors (PSMC) to gain from Punjab govt's yellow cab scheme, according to The News:

KARACHI: Pak Suzuki Motor Company (PSMC) stands to gain from the Yellow Cab Scheme announced by the government of Punjab in its budget for 2011/12, analysts said.

The provincial government has announced that a grant of Rs4.50 billion has been allocated for the scheme, which will partly finance 20,000 vehicles.

Contrary to the yellow cab scheme, the Nawaz Sharif government introduced in 1992/93, this scheme relies on locally-made vehicles.

‘Mehran’ and ‘Bolan’, the two most popular makes of Pak Suzuki, have been short-listed for the scheme.

The analysts said the ultimate beneficiary will be the PSMC, which has been suffering from appreciating yen, relaxation in import policy and production constraints since a tsunami-hit Japan.

Gross profit margin of the company has squeezed to mere two percent in 2010, which was around four percent a year back, they added.

Details of the scheme are yet to be unveiled, but it is expected that the vehicles would be 50 percent financed by the government of Punjab, while the buyer would have to pay the rest.

There are concerns of possible lack of transparency in financing.

Besides, there is a lack of clarity about the time period over which the scheme would be spread.

Furqan Punjani, an analyst at the Topline Research, said that there are possibilities that out of 20,000 only 12,000 to 15,000 units will go in the said scheme and the rest might fall victim to corruption.

An analyst at Arif Habib Research said that it is believed that PSMC’s car volumes would spike by nine percent and 16 percent in CY11E and CY12F.

Consequently, the earning pershare (EPS) of the company would improve by 75 percent and 116 percent in CY11E and CY12F, respectively, he said.

Riaz Haq said…
Here are a few excerpts from a Credit Suisse press release after a recent investment conference in London:

Speaking on the sidelines of Credit Suisse’s first Asean and Pakistan Conference in London last week, Credit Suisse analysts covering Malaysia, Indonesia, the Philippines and Pakistan outlined the case for investing in a group of Asian emerging markets that are not as well known as China or India, but which boast compelling growth and valuation stories.

“Southeast Asia offers investors remarkable opportunities,” commented Stephen Hagger, Credit Suisse’s Country Head and Head of Equities for Malaysia. “These opportunities are created by common themes that apply across many of the markets in this family – themes like infrastructure investment, the increasing spending power of domestic consumers and the growth of financial services.”

“We held this pioneering investor conference in London to draw attention to this story, which has real scale and momentum, and to offer our clients insight into allocating capital to the region,” added Mr. Hagger. Nine corporates from Southeast Asia and Pakistan participated in the conference along with around 40 UK-based investors from 28 funds.

Farhan Rizvi, Credit Suisse’s Head of Research for Pakistan, focused on the banking sector in this South Asian country of 187m people, arguing that Pakistan’s market offered some of the most attractive valuations in Asia for banking stocks. Mr. Rizvi said that the banking sector had de-levered since the 2008 crisis, adding that loan-to-deposit ratios had eased to 60% from a 74% high and that Pakistan’s loan-to-GDP ratio of 22% was the lowest in non-Japan Asia. He added that asset quality had improved as a result and that net interest margins should remain positive at 6.7% in 2011 because of expected tightening and static deposit costs. Rising government appetite for fiscal financing, on the other hand, will drive growth in earning assets. “Pakistan is largely ignored by investors, but we believe its banking sector can achieve average annual earnings growth of 18% between 2011 and 2013,” commented Mr. Rizvi, who upgraded Pakistan’s banking stocks to Overweight on June 27. Beyond the banking sector, Mr. Rizvi said there were also attractive valuations and growth potential in the oil and fertilizer sectors.

Riaz Haq said…
Here are some excerpts from an Indian Financial Express story headlined "More FII money to Pak than to India":

Mumbai: Whether Dalal Street likes it or not, India is now the worst-performing market in the world as dark clouds have started cluttering the economic, investment and political horizons. Worried foreign institutional investors (FIIs), who came to India in droves last year, have been pulling out funds with such alacrity this year that even a much smaller — and significantly more volatile and unstable — market like Pakistan has got more foreign inflows in the last six months.
As per figures of the Securities and Exchange Board of India, FIIs have already pulled out $497 million (including GDRs, primary market, stock markets etc) from India from January to June 22 this year. This has come as a big blow to the market which witnessed an inflow of $29.36 billion in the whole of calendar 2010. FIIs took out Rs 14,387 crore (around $3.2 billion) from the secondary market in 2011, bringing the Sensex down from 21,108 on November 5, 2010 to 17,727.49 on June 23, 2011.

Across the border, Pakistan received a portfolio investment of around $230 million in the last six months. That, too, when the Karachi Stock Exchange, its largest, has a market cap of only $35 billion whereas the Bombay Stock Exchange has a market cap of $1,500 billion.
The latest worry of FIIs is the possibility of tightening in rules governing the tax treaty with Mauritius. If both the governments tighten the regulations governing the treaty, the fund flow through this route will come down drastically. “Funds using this route will go elsewhere. India has got minuscule funds FIIs this year,” said a fund manager with a foreign investment firm.

A large chunk of FII investment in the stock market comes through Mauritius as companies registered there are exempted from tax in India under the treaty. The government had recently indicated about reviewing this tax treaty to tighten registration norms and making the fund flows more transparent.

Riaz Haq said…
The Indian economy is in trouble, says Ramtanu Maitra:

Although the economy continues to show high GDP growth, there is a growing disparity between India's sea of poor people and the few at the top of the heap. Out-of-control inflation, caused by the inflow of billions of dollars in hot money, combined with poor productivity due to weak physical infrastructure has resulted in corruption of unimaginable proportions, which has eaten away the gains made earlier. Prime Minister Manmohan Singh, who heads a group of disparate political parties under the banner of the United Progressive Alliance, is busy keeping the coalition government in power by doing little to prevent further deterioration of the nation's economy.
On June 16, the Reserve Bank of India (RBI) raised its benchmark lending rates for the tenth time in 18 months, as a monetary measure to slow down the rampaging inflation monster, which has already greatly hurt the poor, and is now beginning to hit the middle class, which had benefitted in recent years from the GDP growth and wage rise. The earlier nine such monetary measures within the past 18-month period did not slow down inflation. It is inevitable that the high interest rates will attract more short-term hot money into the country, spurring a faster rate of inflation in the coming days.
India has earned the distinction of incurring the highest inflation of major emerging markets. On June 14, the Singh government said inflation had increased 9.1% in May, compared with a year earlier, a rate higher than expected. High inflation was first observed two years ago in the rise of food prices that affected India's poor the most. But since India's hundreds of millions of poor have little voice in directing New Delhi's economic policies, for the greater part of the last two years such inflation was pooh-poohed by Indian economists, accusing the growing army of the middle class of "over-consumption of food." Now, inflation has shown up everywhere, once again, proving the shortsightedness of those economists.
What this picture, which I elaborate below, underscores, is the inescapable truth that if a fundamental shift away from the monetarist system is not initiated in the United States, and soon, we are looking at the literal devastation of the largest population centers in the world, such as India and China. This is, in fact, the concern of all humanity - and must be stopped.
The Growing Anti-Poor Bias Unwilling to change course, and stubbornly defending the failed economic policy, New Delhi is still harping on India's high GDP growth rate. The New York Times reported on June 15, that Kaushik Basu, the government's chief economic advisor, said, in an interview on June 13, that inflation was a problem that all developing countries were facing. "If you look at emerging economies around the world," Basu said, "India's performance looks pretty run of the mill."
But, neither Basu nor others in the Singh government are interested in taking a good look at the damage done by their strictly money-obsessed policies. "The last two years have been a lost opportunity" for India's governing United Progressive Alliance party, Citigroup said this month in a research report.
This monetarist obsession has given rise to full blown inflation across the spectrum. The unprecedented price rise in basic food items is severely impacting hundreds of millions of Indians. Despite the shouting by the globalizers, investment bankers, and their followers within India, millions of Indian families live on a daily diet which consists of cereal - rice, or wheat flour, or both - some vegetables, including onion, and a variety of lentil, or other similar items. Lentils provide the only significant source of protein they have access to, since they cannot afford to buy other high-protein foods, and this includes a large number of people who are non-vegetarians.. .....
Riaz Haq said…
ATOL reports yet another quick resignation from Pakistan's economic team:

KARACHI - Shahid Kardar's resignation as governor of the State Bank of Pakistan this week after less than a year in the job sends out another deeply negative signal on the country's economic management and further erodes belief in Islamabad's commitment to fiscal reforms demanded by the International Monetary Fund (IMF).

Finance Minister Abdul Hafeez Shaikh is making last-ditch efforts to persuade Kardar to withdraw his resignation, which he submitted mid-week before leaving Islamabad for Lahore. Kardar returned to the capital on Thursday at Shaikh's request to iron out their differences, Dawn reported on Friday, citing an unnamed source.

Kardar was appointed central bank governor last September and is the second in succession to leave the post before completion of the three-year statutory term. His predecessor, Salim Raza, quit for personal reasons in June 2010, although commentators at the time said his resignation was a response to efforts to curtail the central bank's independence. Kardar will remain central bank governor until his resignation is officially accepted, the Wall Street Journal reported.

Critics say the two resignations in quick succession, and Shaukat Tarin's resignation as finance minister in February last year, reflect a failure by the government to take management of the economy seriously. The Pakistan People's Party (PPP)-led government has gone through four finance ministers, five finance secretaries, four deputy chairmen of the Planning Commission and now possibly three central bank governors since it came to power in September 2008.

Concern that Kardar's departure will add to confusion among international organizations such as the IMF as to who has authority to deal with issues that include increasing tax revenues and cutting the government's heavy dependence on loans was downplayed by Sakib Sherani, a former economic adviser to the Finance Ministry.

"The IMF deals with institutions and not individuals so it's likely the acting governor will attend IMF meetings," he said, according to a Reuters report. "What's critical for the markets is who his successor is and why he resigned."

Such pre-term departures from the central bank "serve as a jolt to the banking and finance industry in the country, as the entire industry adopts a 'wait-and-see' strategy", The News reported economist Ashfaque Hassan Khanas as saying.

Kardar resigned amid reports suggesting he had developed serious differences with top state functionaries, according to The Express Tribune. Kardar is reputed to have given the government a hard time at cabinet and economic coordination committee meetings.

Even so, his critics claim he has been unable to exert the central bank's independence. His inability to have a bank amendment act passed in its original shape meant the government approved a "toothless" act, maintaining the Finance Ministry's hold over the central bank.

Pakistani officials, including the central bank governor, are due to meet with an IMF team later this month. Kardar has been supporting fiscal reforms demanded by the IMF, urging a broadening of the tax base and gradual elimination of untargeted subsidies.

He recently called for better debt management by the government to contain the fiscal deficit. The IMF since August 2010 has suspended a US$11.3 billion loan program, initially agreed late in 2008, as Islamabad drags its feet on introducing tax reforms, raising power tariffs and cutting subsidies.

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…
Companies like Pakistan Cables continue to increase profits in spite of all the crises. Here's a Business Recorder report:

Profitability Despite economic slowdown due to a host of reasons including political uncertainty, high inflation, acute energy shortage, currency depreciation and high interest rates, the Company achieved sales of Rs 3.4 billion in FY09, which is 12 percent lower than FY08 sales of Rs 3.8 billion.

The decline in sale compared to last year was due to lower prices of the Company's products, a sharp decline in copper prices during the first half of the financial year, and reduction in demand as a result of the overall economic situation in Pakistan.

The sales increased by 13 percent in the FY10, reaching Rs 3.8 billion.

This was possible due to increase in the price of the product as well as better sales volume.

During FY11, in addition to the economic slowdown and poor law-and-order situation, the year had to face the floods.

Despite this, Pakistan Cables was able to increase its sales by 7.8 percent from last year's figures and touched Rs 4.1 billion.

Even with lower sales in the FY09, gross profit increased by 43.7 percent from FY08 values, reaching Rs 532 million.

Better sales' mix, reduction in copper prices, productivity improvement and cost savings initiatives are the main reasons for this outcome.

In FY10, the gross profit figure fell to Rs 412.3 million, due to the expenses that could not be passed on to the customers.

These include devaluation of rupee against the dollar (which increased the cost of inputs and copper prices) and taking orders at lower margins due to market competition.

Improvement in productivity, better sales' mix, improved margins and operational efficiencies contributed to the rise in the gross profit for the FY11, which amounted to Rs 519.6 million.

The dedication of the Company's management in improving the efficiencies, controlling costs and making decisions for the optimum product mix resulted in the Company's Profit before Income Tax soaring to Rs 101.8 million in FY09 as compared to Rs 53.6 million in the previous year.

This amount stood at Rs 146.7 million in FY11.

In FY09, normalisation of the tax expenses in the year affected the profit after tax figure, which fell from Rs 65.4 million in FY08 to Rs 63.9 million in FY09.

The net profit value continued to fall despite lower interest expenses, and in FY10, the figure touched Rs 45.5 million.

At the end of FY11, the profit after tax amounted to Rs 85.7 million, an increase of 88 percent from last year.

Riaz Haq said…
The Indian stock market today lost its trillion-dollar status, as a decline in the rupee and share valuations led to its size slipping below this mark to $994.97 billion, according to India's Economic Times:

India had managed to hold onto the select league of the countries with a trillion-dollar stock market by a whisker for past few days, but finally gave in today after the market barometer Sensex fell to a fresh 28-month low and the rupee lost further value against the US dollar.

At the end of today's trade, the total size of the Indian market, measured in terms of cumulative valuation of all listed stocks, stood at Rs 52,60,440.78 crore.

As the rupee ended the day at Rs 52.87 level, the stock market's size in the American currency was USD 994.97 billion -- just a shade below the trillion-dollar mark.

The Indian market had a size of USD 1.0116 trillion (Rs 53,48,352.02 crore) at the end of yesterday's trade.

A total of 13 countries are now estimated to be left in the trillion-dollar stock market club, including the US, the UK, Canada, Brazil, Australia, Hong Kong, South Korea, China, Japan, Spain, Germany, Switzerland and France.

The Indian market had first achieved a trillion-dollar size about four and half years ago on May 28, 2007, but moved out of this coveted league about a year later on July 1, 2008.

India again joined this elite club of markets with trillion-dollar valuation about a year later on June 3, 2009.

The Indian market was, in fact, seen inching towards the two-trillion dollar mark at least twice in the past -- first in early 2008 and then at the beginning of 2011 with a size as high as USD 1.9 trillion.

A sharp plunge in the market this year has led to the Indian market valuation falling by close to Rs 20 lakh crore (over USD 500 billion), from about Rs 73 lakh crore (USD 1.7 trillion) at the beginning of 2011.

The rupee has been a declining trend for many months now and had hit its record low level below Rs 54-level last week, but the fall was somewhat arrested since then on the back of an intervention by the Reserve Bank.

The market size has been hovering above the trillion- dollar mark for last few days and an eminent miss was averted on Thursday last week, when the RBI managed to reverse the downfall of rupee after a record fall to Rs 54.30 level.

On Friday, the market size stood at Rs 54,11,301 crore or USD 1.026 trillion, based on that day's currency rate of Rs 52.30, as the market tanked sharply. The trillion-dollar tag had been lost that day itself, if the rupee had managed to hold onto its record high levels.

In terms of individual exchanges, the total size of stocks listed on the NSE yesterday itself slipped below trillion-dollar mark to USD 989 billion (Rs 52,30,333 crore).

At the end of today's trade, NSE-listed market valuation stood at Rs 51,42,566 crore (USD 972.68 billion).

However, the market valuation of NSE-listed companies is not considered as the country's stock market size, as not all the companies are listed on this exchange.

Indian stocks are mainly listed on two national bourses, the BSE and the NSE, but the numbers of listed companies on the two stock exchanges differ sharply.

While about 1,600 stocks are actively traded on the NSE, the number is almost double at over 2,900 at the BSE.

Almost all the stocks listed on the NSE are also listed on the BSE and therefore the cumulative valuation of companies listed on the BSE is treated as the total market size.

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…
Karachi stocks jump almost 7% on tax policy news, reports Daily Times:

The Karachi stock market was dominated by bullish sentiment during the week as news regarding the proposals sent by Securities and Exchange Commission of Pakistan (SECP) to the Ministry of Finance pertaining to capital gains tax (CGT), withholding tax (WHT) and disclosure of the source of income created positive investor sentiment.

Furthermore, the announcement in the KSE regarding the visit of Finance Minister Hafeez Shaikh on the last trading day also provided impetus to the market as he is expected to announce some major changes to the CGT regime.

The Karachi Stock Exchange (KSE) 100-share index gained 760.22 points or 6.9 percent to close at 11, 774.68 points as compared to 11,014.46 points of the previous week.

“The 100-share index rallied 6.9 percent during the week, highest since April 03, 2009 (146 week high),” said JS Sec analyst Naveed Tehsin. “However, foreigners remained net sellers, offloading shares worth $3.7 million.”

Positive expectations related to the CGT issue ruled the market sentiment, while continuing global economic crisis and uncertain domestic political environment failed to dampen investor confidence, he said and added that moreover, the circular debt adjustment worth Rs 150 billion through issuance of Term Finance Certificates (TFCs) and the raid by Competition Commission of Pakistan (CCP) at All Pakistan Cement Manufacturers Association (APCMA) office were the major highlights of the week.

News regarding the proposals sent by SECP to the Ministry of Finance pertaining to CGT, WHT and disclosure of the source of income created positive investor sentiment.

The government of Pakistan has decided to adjust circular debt worth Rs 150 billion through issuance of TFCs. Reportedly the banks have agreed to subscribe to these issues that is likely to provide relief to the energy and banking sectors by converting loans of the energy companies into TFCs. Despite this news, banks and electricity sectors underperformed the market by 2.8 percent and 3.6 percent, respectively.

The daily turnover increased 456.69 percent to close at 178.42 million shares as against 32.05 million shares of the previous week.

“Stocks closed bullish during the week with record high trades on the last trading day of the week,” said Arif Habib Investments Ltd Director Ahsan Mehanti. “Hopes of good news regarding CGT issues supported the market while positive revision in Pakistan economic growth estimate to 4 percent, recovery in global stocks, foreign interest in blue chips and statement issued by White House on US, Pakistan to work together to reset ties played a catalyst role in the bullish sentiment at KSE.

Riaz Haq said…
Here's Express Tribune on MSCI status of Pakistan:


MSCI, a leading provider of investment decision support tools worldwide, has maintained status quo in its February 2012 review with Pakistan stock market’s weight remaining intact.

According to the results of the Quarterly Index Review announced by MSCI, two companies – Sacombank (Vietnam) and Ceylon Tobacco Co (Sri Lanka) – will be added to the MSCI Frontier Market Index but there will be no deletion.

For Pakistan, which is among 25 countries of the Frontier Market Index, no change was made in the existing 13 companies.

In May 2009, Pakistan was included in the Frontier Market. Since then, MSCI has been reviewing Pakistan’s situation due to limited number of sizable securities.

In 2011, though Pakistan posted a negative return of 17%, it outperformed all the Frontier Markets in Asia. Sri Lanka declined by 29%, Vietnam posted a negative return of 40% while Bangladesh lagged behind to post a negative return of 44%.

“While the next MSCI review is due in May, the annual review in June could be crucial. A near-term positive that Pakistan can hope for is an upgrade of UAE and Qatar to Emerging Markets as it will lead to 130-basis-point weightage gains,” says KASB Securities in a research note.

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.


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