South Asia Investor Review

The year 2012 was a mixed bag. Economy continued its modest recovery with the stock market hitting new records but it was marred by rising civilian casualties and the worsening energy crisis. The coalition government led by the Pakistan Peoples' Party is nearing its full term with a new prime minister and the political parties have begun campaigning for general elections in the first half of 2013 .  Below is a summary of positive trends and problems witnessed by Pakistanis in 2012:   Positive Trends: 1. GDP growth rate doubled from the low of 1.71% in 2009 to 3.67% in 2012.   Consumer price index hit a low of 7.9% in December, the lowest in South Asia region . 2.  Terrorism related fatalities declined from the peak of 11,700 in 2009 to 6,211 in 2012, and slightly decreased from 6,303 in 2011, according to SATP . Sectarian deaths accounted for 507 of the 6,2011 victims of terrorism in 2012. 3. Karachi's KSE-100 index surged nearly 50% (37% in US $ t...

Karachi's KSE-100 index surged nearly 50% (37% in US $ terms) in 2012 to top all Asian market indices . It was followed by Bangkok's SET index which advanced 36%. It also easily beat India's Sensex index which was the top performer among BRICs with 25.19% annual gain . A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank's rate cuts helped the KSE-100 index approach 17,000 level, a gain of  49.84% (37% in US dollar terms). In spite of this run-up in KSE-100 , Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, remains bullish on Pakistani equities, according to Barron's . Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. Here's an excerpt of a recent Busine...

A 2012 study of 22 nations conducted by Prof Miles Corak for the Organization for Economic Cooperation and Development (OECD) has found income heritability to be greater in the United States, the United Kingdom, Italy, China and 5 other countries than in Pakistan. The study's findings, presented by the author in testimony to the US Senate Finance Committee on July 6, 2012, rely on the computation of "inter-generational earnings elasticity" which the author explains as follows: "(It) is the percentage difference in earnings in the child’s generation associated with the percentage difference in the parental generation. For example, an intergenerational elasticity in earnings of 0.6 tells us that if one father makes 100% more than another then the son of the high income father will, as an adult, earn 60% more than the son of the relatively lower income father. An elasticity of 0.2 says this 100% difference between the fathers would only lead to a 20% differenc...

Even with the run-up (in KSE-100) , Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, says Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. In Pakistan, the informal, cash-based economy for goods and services is larger than the formal economy.  Barron's, November 17, 2012 Growing gap between dismal official economic statistics and consumption boom coupled with strong corporate profits in Pakistan is a challenge for many analysts around the world. Most believe that Pakistan's GDP is, in fact, much larger and growing faster than the government data indicates. Informal Economy Estimates:  M. Ali Kemal and Ahmed Waqar Qasim, economists at Pakistan Institute of Development Economics (PIDE), have published their research o...

Renewed construction boom in Pakistan has helped the nation's cement producers significantly increase their sales and profits. Year-over-year, income at Lucky Cement, Pakistan's largest producer of building materials,  is up 33% while DG Khan Cement, second largest cement company, has quadrupled its profits. Source: Credit Suisse Report on Pakistan Cement Sector Cement production, an important barometer of national economic activity, was up 8% in 2011-12, according to a research report compiled by a Credit Suisse analyst . CS analyst Farhan Rizvi says in his report that "higher PSDP (Public Sector Development Program) spending has led to a resurgence in domestic cement demand in FY12 (+8%) and with increased PSDP allocation for FY13 (+19%) and General Elections due in Feb-Mar 2013, domestic demand is likely to remain robust over the next six-nine months". Nagan Chowrangi Interchange in Karachi  Ongoing public sector projects include new large and smal...

Media coverage of Pakistan's brisk Eid-ul-Azha livestock sales are a reminder that the nation is among the world's  top ten consumers of goat meat  and beef based on  USDA data . Pakistan's goat meat consumption of 779,000 tons in 2011-12 ranks it among the top 3 in the world. 1.7 million tons of beef consumption in Pakistan is ranked  9th among beef consuming nations. In addition, 834,000 tons of poultry meat consumption puts it among world's top 20. Source:  Economic Survey of Pakistan 2011-12 Along with rising meat consumption, there has also been a big surge in milk consumption with the ongoing  livestock revolution in Pakistan . Pakistanis consumed nearly 39 million tons of milk in 2011-12, according to  Economic Survey of Pakistan . This translates into 223 Kg of milk consumption per person which is about the same as the  developed world's per capita milk consumption  and more than twice that of neighboring  India's 96 k...

US is providing $80 million to create multiple VC and PE funds in Pakistan. These funds will be run by professional fund managers who will be required to manage and raise additional money from other sources to start multiple funds. US Embassy in Islamabad told Express Tribune that they expect that "there will be substantial interest from local, regional and international investors”. Polish Model: The initiative is based on the Polish American Enterprise Fund model which was started with $140 million from US government and has now grown to several billion dollars of investable funds, according to Express Tribune . US AID's Theodore Heisler said that co-investment was essential in bringing the size of each fund to a level where it can cover operating expenses. The funds will focus on investing in small and medium entrepreneurial companies which, the US Silicon Valley experience has demonstrated, are major drivers of innovation, economic growth and job creation. Histo...