Tuesday, April 21, 2015

Smart Money to Follow China's Massive Investment in Pakistan

This (China's $46 billion investment in Pakistan) can not be purely politically driven. Beijing is commercial: CEO’s, not think tank intellectuals, travel with politicians. Barron's Asia

Spurred by Chinese investment, the smart money is taking notice of Pakistan as an attractive investment destination. The investors are looking at the fact that Pakistani stocks have been outperforming both emerging and frontier markets for several years. The benchmark index of the Karachi Stock Exchange (KSE100) is up more than 20% in the last 12 months, according to NASDAQ.com.

Pakistani Shares in 2015:

After a dismal March, MSCI Pakistan rebounded strongly this month, returning 9.1% so far. In April, the iShares MSCI Frontier 100 ETF (FM) rose 4.3%, the WisdomTree India Earnings Fund (EPI) dropped 1.2%, the iShares MSCI India ETF (INDA) fell 1.9%, according to Barron's Asia.

Source: Economist Magazine
KSE-100 Performance:

In 2014, the KSE-100 Index gained 6,870 points thereby generating a handsome return of 27% (31% return in US$ terms), making Pakistan's KSE world's third best performing marketTotal offerings in the year 2014 reached 9 as compared to 3 in the year 2013. After a gap of seven years, Rs 73 billion were raised through offerings in 2014 as compared to a meager Rs 4 billion raised in 2013. Foreign investors, that hold US$ 6.1 billion worth of Pakistani shares -which is 33% of the free-float (9% of market capitalization)-remained net buyers in 2014.

Pakistani Shares Valuation:

Even after outperforming both emerging and frontier market indices, Pakistani shares can be bought at deep discounts which make them very attractive, according to Renaissance Capital’s chief economist Charles Robertson.  MSCI (Morgan Stanley Composite Index) Pakistan trades at only 8.4 times forward earnings, a 17% discount to MSCI Frontier Markets. For comparison purposes, fellow frontier south Asia markets Sri Lanka and Bangladesh trade at 13.4x and 21.4x respectively. India, included in the emerging market index, trades at 16.8 times.

Key Sectors: 

Chinese investment in energy and infrastructure will help stimulate all sectors of Pakistani economy. But the sectors benefiting most from the $46 billion investment will likely include banks, energy and building materials, the sectors which are the favorites of  Pakistani billionaire investor Mian Mohammad Mansha.

Being close to the ruling Sharif family makes Mansha the ultimate insider. Beyond his investments in banking, cement, energy and textiles, Mansha is also starting to invest in consumer products sector benefiting from rising incomes, growing middle class and increasing jobs created in Pakistan by the massive Chinese investment. Mansha owns a big chunk of Muslim Commercial Bank (MCB) share. He has recently been pumping more money into energy, cement and dairy businesses. Mansha's DG Khan Cements has announced plans to build a $300 million cement plant near Karachi. In additions, his Nishat Dairies has imported thousands of dairy cows for a dairy farm in Lahore.


The $46 billion Chinese investment in energy and infrastructure has brought attention to tremendous investment opportunities in Pakistan, a nation of nearly 200 million people with rising middle class and growing consumption.  Pakistani military's recent successes against the terrorists and China's massive investment commitments are expected to boost investor confidence in the country. Higher confidence will help draw other significant investors to invest in Pakistan over the next several years.


Majumdar said...

Prof Riaz ul Haq sb,

China's $46 billion investment in Pakistan can not be purely politically driven. Beijing is commercial: CEO’s, not think tank intellectuals, travel with politicians.

Ha, ha, sir! Coming on the heels of your last article, this was a nice swipe at us Bhindoos, no? Learning humour with age, sir!


Huang said...

Infrastructure (actually energy belongs to this category) is the platform on which economic activities can be carried out, and should be strategically led by the state in planning, investment, and control. With a good platform, the private sector i.e. "smart money" will then become the key driver of economy. Put it simply, set the stage, let the artists perform.

Anonymous said...

I am sure that Gwadar and Jiwani will become world class cities with just 5-7 years time and local investors would be investing along with the Chinese there in.

Riaz Haq said...

The Indian stock market, as reflected by the S&P BSE Sensex, has fallen by at least 2,100 points or 7.1% from its highs and is adjusting to the reality of subdued earnings. Company results for the January-March 2015 quarter, so far, have not been encouraging, though analysts expect things to improve by the second half of the current financial year. The street expects earnings to get better with the improvement in business environment and pick-up in economic activity. Put differently, in the medium term, market movement will largely depend on the pace of expansion in the economy, which, to a large extent, will be determined by government action and implementation of ideas such as increasing capital expenditure.
Interestingly, even as some investors are getting edgy and expect quick government action on various fronts, observations from some of the international institutions that came in this month were largely optimistic about the future of the Indian economy. Encouraged by the recent policy action, rating agency Moody’s, while affirming its Baa3 rating on India, changed its outlook to positive from stable. It said in a statement: “…recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India’s sovereign credit constraints.”
The government’s intent to improve the economic environment and action taken in this regard is being recognized. “Growth will benefit from recent policy reforms, a consequent pick-up in investment, and lower oil prices. Lower oil prices will raise real disposable incomes, particularly among poorer households, and help drive down inflation,” said the latest World Economic Outlook (April 2015) of the International Monetary Fund (IMF). Growth in India, according to the IMF, will be higher than that in China in 2015 and 2016, making it the fastest growing large economy in the world. It expects India to grow at 7.5% in both 2015 and 2016. Meanwhile, the Chinese economy is expected to expand at an annual pace of 6.8% and 6.3%, respectively.
The World Bank had similar observations about the Indian economy. In its South Asia Economic Focus (Spring 2015) report, it noted, “India’s economy is poised to accelerate on the back of an ambitious reform agenda, and faster growth is expected to further drive down poverty.” The acceleration in growth, according to the World Bank, will be led by investment, which is expected to grow at an average rate of 12% between 2015 and 2017.
However, not all are equally enthused. A recent report (India’s Fiscal Roadblocks Could Stall Infrastructure Progress) by Standard & Poor’s presented a different picture. “India’s public finances are less than rock solid due to long-standing cracks in its budgetary system. While the country’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock,” the report said. It also highlighted that further reforms will be required on the fiscal front to be able to sustain higher investment spending. Efficient subsidy spending, which can free up resources for capital spending, is necessary to attain and maintain higher growth in the medium to long term. Both markets and policymakers will do well by paying attention to Standard & Poor’s observations. In fact, a financial or commodity shock can not only affect the progress made on the fiscal front, but also the wider economy.


Riaz Haq said...

BBC on Chinese investment in Pakistan:

A former diplomat, Ashraf Jehangir Qazi, said in a TV debate that the Pakistani army has decided to raise a special force to safeguard this 3,000km corridor.
Many are sceptical because the army previously failed to ensure a trouble-free supply to Nato troops in Afghanistan.
But some believe the military is likely to treat the Chinese corridor differently because the economic benefits accruing from it could help isolate Baloch insurgents.
Why is China doing this?
Pakistanis have long described their "friendship" with China as higher than the Himalayas, deeper than the oceans, and as information minister Pervez Rashid put it more recently, sweeter than honey. But behind these lofty words lie some hard-core interests.

China has been a more reliable and less meddlesome supplier of military hardware to Pakistan than the US, and is therefore seen by Pakistanis as a silent ally against arch-rival India.
Friendly exchanges with China also help Pakistan show to its "more volatile" allies in the west, notably the US, that it has other powerful friends as well.
For the Chinese, the relationship has a geo-strategic significance.
The corridor through Gwadar gives them their shortest access to the Middle East and Africa, where thousands of Chinese firms, employing tens of thousands of Chinese workers, are involved in development work.
The corridor also promises to open up remote, landlocked Xinjiang, and create incentives for both state and private enterprises to expand economic activity and create jobs in this under-developed region.

China could also be trying to find alternative trade routes to by-pass the Malacca straits, presently the only maritime route China can use to access the Middle East, Africa and Europe. Apart from being long, it can be blockaded in times of war.
This may be the reason China is also pursuing an eastern corridor to the Bay of Bengal, expected to pass through parts of Myanmar, Bangladesh and possibly India.
Experts say much of Chinese activity is geared towards boosting domestic income and consumption as its previous policy of encouraging cheap exports is no longer enough to sustain growth. On the external front, it is investing in a number of ports in Asia in an apparent attempt to access sources of energy and increase its influence over maritime routes.


Riaz Haq said...

#Pakistan ETF launched to track price, yield performance of MSCI All Pakistan Select 25/50 Index.
http://247wallst.com/investing/2015/04/22/is-a-pakistan-etf-launch-for-you/ …

Global X is adding a new ETF under the Frontier Market Family of Global X ETFs, called the Global X MSCI Pakistan ETF (PAK). This is set to track the price and yield performance of the MSCI All Pakistan Select 25/50 Index.

The new ETF will offer U.S. investors access to the largest, most liquid publicly traded companies in Pakistan. If you have looked at emerging market tables in the Economist or elsewhere, Pakistan is often cited as being among the top-performing nations. If you want proof of this, the Karachi Stock Exchange’s KSE 100 Index has risen roughly 200% over the past five years alone (see chart below).

ALSO READ: Lessons of Force Majeure for 2014, 2015 and Beyond

The fund’s total expense ratio of 0.88% is based on a 0.68% management fee and 0.20% in custody fees. Global X included a description of the index as follows:

The MSCI All Pakistan Select 25/50 Index is designed to represent the performance of the broad Pakistan equity universe, while including a minimum number of constituents. The broad Pakistan equity universe includes securities that are classified in Pakistan according to the MSCI Global Investable Market Index Methodology, together with companies that are headquartered or listed in Pakistan and carry out the majority of their operations in Pakistan.

Some basic facts that Global X provided along with its distribution material are as follows:

Goldman Sachs has included Pakistan in its “Next 11” list of economies.
Pakistan demonstrated zero correlation with the S&P 500 in 2014.
Pakistan is one of the larger, more liquid frontier markets. With a large, youthful labor force, it has become an enticing destination for investors looking beyond traditional emerging markets, which have been demonstrating slowing growth.
The ETF fact sheet shows that the index has 31 holdings in it. Also, the industry weightings are concentrated in financials (32.7%), energy (24.2%), materials (23%) and utilities (10.8%) — roughly 90% in four sectors alone. The top equity holdings with weightings in the ETF are as follows:

MCB Bank, 11.5%
Oil & Gas Development, 9.8%
United Bank, 6.1%
Fauji Fertilizer, 5.9%
Lucky Cement, 5.7%
Hub-Power, 4.9%
Pakistan State Oil, 4.8%
Engro, 4.7%
Bank Al-Habib, 4.1%
National Bank Pakistan, 3.7%
ALSO READ: Will India Be the Next Driver for Alternative Energy?

More support for the growth of Pakistan came from IMF data. Pakistan’s gross domestic product (GDP) expanded from $80 billion in 2000 to over $230 billion in 2013, a 4.3% annualized growth rate. The nation’s per capita GDP on a purchasing power parity basis has risen from $2,683 in 2000 to $4,746 in 2014 — and analysts expect that Pakistan’s GDP will grow at an annualized rate of 4.6% through 2019.

Read more: Is a Pakistan ETF Launch for You? - 24/7 Wall St. http://247wallst.com/investing/2015/04/22/is-a-pakistan-etf-launch-for-you/

Riaz Haq said...

#Pakistan: New U.S.-listed ETF set to capitalize on growing interest in Pakistan's markets http://on.wsj.com/1Es7CSM via @frontiermarkets

China’s launch on Monday of a massive infrastructure-spending plan in Pakistan has brought considerable attention to the South Asian frontier market. Chinese President Xi Jinping announced and launched a $28 billion package of infrastructure deals that will form part of the so-called China Pakistan Economic Corridor.

Last weekend, Pakistan’s Planning Minister Ahsan Iqbal said the total Chinese investment into Pakistan would reach $46 billion.

Much of the spending will focus on power and transportation and is expected to boost Pakistan’s already-burgeoning economy. The announcement is also helping the country’s stock market to recover from a slump that saw the MSCI Pakistan index fall by more than a fifth in dollar terms over the two months to the end of March.

China’s colossal investment plan is not the only potentially market-moving news for Pakistan this week. Investment Bank Renaissance Capital yesterday described the country as an “undervalued reform story”, noting that the government is living up to its privatization promises—including its recent record-breaking sale of its stake in private sector banking giant HBL—and delivering reforms that should enhance stock valuations.

Against this backdrop, the timing of the launch of the first Pakistan-focused exchange-traded fund in the U.S. is remarkably fortuitous. U.S.-based ETF provider Global-X is launching the ETF tomorrow on the New York Stock Exchange.

The fund joins a growing list of single-country frontier-market ETFs, including Global-X’s Argentina and Nigeria funds, as well as Market Vectors’ Vietnam fund. Jay Jacobs, research analyst at Global X Funds, says: “With the launch of the … Pakistan ETF, investors now have access to one of the largest, most liquid frontier-market countries.”


Riaz Haq said...

Pakistan is another frontier market, full of potential based on growing population and middle class, rapid urbanization and industrialization, and ongoing, albeit slow, economic reforms. However, as with other frontier markets, many political and headline risks paired with weak market regulation continue to prevent Pakistan from receiving serious foreign investment. iShares MSCI Frontier 100 Fund ETF is virtually the only way to get a small 4.7% exposure. A dedicated ETF, Global X Pakistan KSE-30 ETF (PAK) has been in registration since 2010.

The Global X has filed for Next 11 ETF (Pending:NXTE) that will cost 0.75% and track the Solactive Next 11 Index, but its launch date is anyone's guess. Perhaps Global X is looking to launch at the same time as the Pakistan and Bangladesh ETFs to improve liquidity. The largest index provider MSCI in the meantime has come up with its own MSCI Next 11 ex-Iran GDP Weighted Index, which is waiting to be licensed.

Riaz Haq said...

The first Pakistan-focused ETF started trading in New York on Thursday, and the ETF’s launch might be well-timed, as China on Monday unveiled plans to invest $46 billion in the world’s sixth-most populous country.

The launch slot for the Global X MSCI Pakistan ETF PAK, +0.06% is “remarkably fortuitous,” noted Dan Keeler, writing for The Wall Street Journal’s frontier markets blog. He added that China’s massive infrastructure development program (known as the China-Pakistan Economic Corridor) is not the only potentially market-moving news this week for Pakistan, as Renaissance Capital on Tuesday described the South Asian nation as an “undervalued reform story” that’s delivering on its privatization promises. Skeptics say China’s planned investment might not materialize, especially if Pakistan continues to serve as a terrorist haven.

Speaking of China, this month also has brought the launch of the first leveraged ETF tied to China’s frenzied mainland stock market. Investors ought to treat this turbocharged product with great care, wrote Barron’s Chris Dieterich on Tuesday, likening the ETF to strapping “a rocket booster to the back of a dragon.” Its full name is the Direxion Daily CSI 300 China A Share Bull 2x Shares ETF. CHAU, -2.85%

The number of foreign single-country ETFs listed in the U.S. has grown to 204. (XTF.com data as of Wednesday put the figure at 203, so add the Pakistan product and you get 204.) Excluding leveraged products, there are 177 single-country ETFs.

About 30 new single-country ETFs came to market in 2014, and there are more than twice as many such funds as there were five years, said Ashley Lau in a Reuters report last month. Risks around single-country ETFs include their tendency to trade at much larger premiums or discounts than major U.S. domestic ETFs, she added. Another risk is many such funds have big exposure to a single stock or sector, as a Journal report once noted.


Riaz Haq said...

NEW YORK, April 23, 2015 /PRNewswire/ -- Global X Funds, the New York based provider of exchange-traded funds (ETFs), today launched the Global X MSCI Pakistan ETF (NYSE Arca: PAK). The fund is the first US-listed ETF to focus exclusively on Pakistan, providing investors with access to the largest companies by market capitalization in the country. Goldman Sachs has designated Pakistan as one of the "Next 11" economies – a group of large, fast-growing markets that are expected to be an important source of global economic growth and opportunity in the future.[1]

In addition to being the sixth most populous country in the world with over 196 million people, almost 60% of Pakistan's population is under the age of 25[2]. Pakistan is geographically positioned to benefit from the growing trade among China, India, Russia, Turkey and the Middle East. The country's Prime Minister Nawaz Sharif has also shown a commitment to strengthening its economy, lowering inflation and promoting stability since his election in 2013.
"With the launch of the Global X MSCI Pakistan ETF, investors now have access to one of the largest, most liquid frontier market countries," said Jay Jacobs, research analyst at Global X Funds. As investors search globally for investment opportunities, frontier markets like Pakistan are increasingly garnering attention for their historically low correlations to developed markets and growth potential.
Global X is a New York-based sponsor of exchange-traded funds (ETFs), offering access to investment opportunities across global markets. Founded in 2008, Global X is recognized by individual and institutional investors for its suite of income, international, commodity and alternative funds. With over 40 funds available across U.S. and foreign exchanges, Global X is one of the fastest growing issuers of ETFs. For more information, please visit www.globalxfunds.com.
Related Quotes
PAK Watchlist

Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Certain economies in the Middle East depend to a significant degree upon exports of primary commodities such as oil. A sustained decrease in commodity prices could have a significant negative impact on all aspects of the economy in the region. Middle Eastern governments have exercised and continue to exercise substantial influence over many aspects of the private sector. As an emerging country, Pakistan's economy is susceptible to economic, political and social instability; unanticipated economic, political or social developments could impact economic growth. Pakistan is also subject to natural disaster risk. In addition, recent political instability and protests in the Middle East have caused significant disruptions to many industries. Continued political and social unrest in these areas may negatively affect the value of your investment in the Fund. Pakistan has recently seen elevated levels of ethnic and religious conflict, in some cases resulting in violence or acts of terrorism. Escalation of these conflicts would have an adverse effect on Pakistan's economy. The fund is non-diversified.


Riaz Haq said...

The Global X MSCI Pakistan ETF (Pending:PAK) tracks the MSCI All Pakistan Select 25/50 Index, making it the first ETF to focus on Pakistan's economy."The broad Pakistan equity universe includes securities that are classified in Pakistan according to the MSCI Global Investable Market Index Methodology, together with companies that are headquartered or listed in Pakistan and carry out the majority of their operations in Pakistan," as stated in PAK's prospectus.Broad frontier market ETFs: FM, FRN, EMFM


Riaz Haq said...

For the adventurous, and usually, professional investor, Pakistan has been a rewarding place to invest. Pakistan, classified as a frontier market, was the world’s fifth-best equity market regardless of market classification last year.
In local currency terms, stocks in Pakistan gained 49.4% last year, topping the S&P 500, every benchmark index in Europe and plenty of other emerging and frontier markets along the way. The country is somewhat hard to access for most investors, though one notable exchange traded fund appears likely to increase its allocation to Pakistani stocks in the near-term. [A Strong, Hard to Access Frontier Market]
Index provider MSCI (NYSE: MSCI) said it will boost Pakistan’s weight in the MSCI Frontier Market 100 Index to 8.9%. That index is the underlying index for the $659.9 million iShares MSCI Frontier 100 ETF (NYSEArca: FM), where Pakistan is currently the sixth-largest country weight at just 4.4%.
Pakistan’s increased weight in the frontier index means the combined weight to Kuwait and Nigeria will be trimmed to 40% from 51.3%. It was expected that after Qatar and the United Arab Emirates leave the frontier index next month for the MSCI Emerging Markets Index that Kuwait and Nigeria would combine for over half of the index and FM’s weight. [Defining Frontier Market ETFs]
Pakistan was demoted to frontier status in 2009 after its equity market was closed to sellers for over 100 days during the 2008 global financial crisis, according to news reports. Although Pakistan’s weight in FM will not increase until next month, “the impact of the decision was felt immediately. Foreigners purchased a net of $35.8 million worth of equity at the bourse (last) week and were the prime reason behind the KSE-100’s strong performance,” according to The Express Tribune.
Another ETF already allocates more than 8% of its weight to Pakistan: The EGShares EM Dividend High Income ETF (NYSEArca: EMHD), which debuted in August 2013. Pakistan is EMHD’s fifth-largest country weight at 8.1%. [Compensation With Emerging Markets ETFs]
EMHD’s 48 holdings are reasonably valued, even by the current standards of emerging markets stocks. The ETF sports a P/E ratio of 8.8 and a price-to-book ratio of almost 1.2, according to EGShares data. Pakistan has pushed to regain its emerging markets status, but has thus far been unsuccessful.


Anonymous said...

If the export to west ceases, chinese economy will cease to exist. Chinese economy was established due to FDIs during 80s and 90. India is following the same path, though a bit later. As far as Pakistan goes, it needs to tackle its security problem and failed technical and higher education. Primary education does not count.

Riaz Haq said...

Anon: " If the export to west ceases, chinese economy will cease to exist."

US today is so dependent on China that ordinary
Americans' daily lives would come to grinding halt, Walmart would go out of business and US F-35 stealth fighters would be grounded without imports from China.



Riaz Haq said...

THOSE in search of a thriving stockmarket, a stable currency and low inflation would not normally pitch up in Pakistan. It is more readily thought of as a pit of instability than as a source of opportunity. Yet Pakistan is enjoying a rare period of optimism about its economy.

The IMF reckons that the economy will grow by 4.7% next year, the fastest rate in eight years. Consumer prices rose by 2.5% in the year to March, the smallest increase for more than a decade. Twice already this year the central bank has lowered its benchmark interest rate. Some indicators are pointing to an upturn in spending. Compared with a year earlier, cement sales, which are a guide to how much construction is taking place, rose by 5.5% from July to March. Car sales rose by 22% over the same period.

A fall of two-fifths in the oil price is a huge slice of luck for a country such as Pakistan. It relies on imported fuel oil for two-fifths of its power supply and is prone to periodic balance-of-payments crises (see chart). The country’s import bill can easily overwhelm the foreign-exchange earnings from textile exports and the remittances that Pakistanis working in the Middle East and Europe send home. In 2013-14 Pakistan’s net import bill for oil came to $12.6 billion, or around 5% of GDP. But if oil prices stay low, Pakistan could save a total of $12 billion in the next three years, says the IMF. The money could be spent on things with more local content and give the economy a lift.

The government of Nawaz Sharif takes some credit for the economy’s new stability. It has stuck to an IMF programme agreed to in 2013, a few months after it came to power in Pakistan’s first-ever handover from one civilian government to another. Foreign-exchange reserves have more than doubled, to $17.7 billion. Electricity tariffs have been raised, and some unpaid bills collected, easing the cash burden on hard-pressed distribution companies. Tax receipts have risen, albeit from pitiful levels, in response to efforts to broaden the base and cut exemptions. The revenue agency has sent over 150,000 tax notices to non-payers. More retailers are being drawn into the indirect-tax net. A draft budget aims to bring the budget deficit below 4% of GDP in 2015-16, from a peak of over 8%.

A privatisation drive that stalled last June resumed in April, when the government sold its stake in Habib Bank, the country’s largest lender, for $1 billion. Three-quarters of bids came from foreign investors. Pakistan’s stockmarket has doubled in dollar terms since the start of 2012, thanks in large part to such foreign interest. Privatisations will only add to the market’s variety and appeal. Listed companies are highly profitable, although in part because they often face too little competition.

Visitors to Pakistan are surprised to discover good roads and a strong business culture. The country is mid-table in the World Bank’s ease-of-doing-business rankings, well above India. The infrastructure is solid enough to support big fast-food chains: McDonald’s, KFC, Pizza Hut and Subway have 187 outlets between them, more than in all of Sub-Saharan Africa’s “frontier” economies combined, says Daniel Salter, of Renaissance Capital, a stockbrokers.

The progress in providing economic stability is encouraging. But Pakistan needs sustained growth of 5-7% a year if it is markedly to cut poverty—at the last count, nearly a quarter of Pakistanis were below the poverty line. There are doubts to whether Mr Sharif has the strength and authority to implement deeper reforms. Despite a better electricity industry, power shortages remain a bugbear. Big firms in textiles, which account for over half of Pakistan’s exports, have long taken to generating their own electricity.


Riaz Haq said...

Is Pakistan the most exciting place to live in the 21st century? It’s almost as if someone has unleashed good news for the country on all fronts; economic, political and security. Over $40 billion in Chinese investment are on their way but more importantly a bet by the world’s next superpower to tie its regional ambitions to Pakistan’s prosperity. This is a game-changing Marshall plan of sorts that appears too good to be true. On security, the army, civilian leadership and civil society are steadily taking the battle to religious extremists instead of indulging in in-fighting and appearing like sitting ducks. On politics, a stunning election took place in Karachi last month, on the hottest of seats, but the result was respected by all parties as the polls were largely free and fair. Rewind a few months back when the country was about to unravel on rigging allegations. Who are you and what have you done to my country that it couldn’t get anything right?

As a wise man once said, abhi tau party shuru hui hai. Fuel and electricity prices have steadily declined in Pakistan over the last few months and we sit on the cusp of a consumer spending bonanza that will fuel the informal economy. Both consumers and producers will see their bottomlines improving behind lower fuel prices and subdued inflation. More importantly, this isn’t a cheap credit-driven bubble that will burst anytime soon (unless fuel prices rise abruptly). There is another geo-political prize in the making. Iran and America are flirting with the idea of becoming friends. If this happens, sanctions could be lifted and Pakistan could finally get cheap gas from Iran to overcome domestic shortages. A big, hungry market may also open up next door and we could potentially import cheaper oil too. If this isn’t enough, international cricket is returning to Pakistan, too. Who are you and what have you done to the country that was destined to become a failed state?

Before you dismiss me as someone in denial about the gravity of Pakistan’s real problems, let me clarify that the purpose of this article isn’t to argue that Pakistan doesn’t have serious problems. The purpose of this article is to argue that Pakistan is more than the sum of its problems. Several bright spots are beginning to emerge in the country but no one is connecting the dots. When it comes to declaring Pakistan a failed state, the mainstream media is quick to connect the dots and focus hysterically on doomsday scenarios that drive ratings. But no one wants to talk about a confluence of positive economic, geo-political, security and political factors that are setting up Pakistan for success by firmly nudging us in the right direction. How dare you, Pakistan? Who are you and what have you done to the country where hopelessness had defeated hope itself?

Pakistan may not be the richest country to live in the 21st century. It may not be the safest country to live in the 21st century. But it may just be the most interesting country to live in the 21st century. Consider this: the Pakistani people are frontline warriors in the greatest ideological battles of the 21st century, including the battle against religious extremism.


Riaz Haq said...

Pakistan is an important part of the Silk Road strategy as it will be a conduit for Middle Eastern oil, via the Pakistani Port of Gwadar.

Pakistan is not the most stable country though, so massive investment in basic infrastructure like electricity generation is required as a first step to reduce risk. Increased trade and investment will create jobs, which is a crucial aspect of creating a more stable society.

But Pakistan is just the start. You can expect to see much more of these types of projects in the years to come. The main vehicle for financing this investment is the Asian Infrastructure Investment Bank (AIIB).

This is a multilateral bank set up by China. So far, there are about 60 member countries, including Australia, who joined the bank in March this year.

You may remember the furore it caused. The US didn’t want its allies, including Australia, to join. That’s because the AIIB threatens to undermine the influence of both the International Monetary Fund and the Asian Development Bank, institutions predominantly run and controlled by Washington.

But Australia, the UK and most of Europe didn’t listen. They all signed up to the AIIB, which is expected to launch officially by the end of this year. Only the US, Japan and Canada remain opposed to joining.

The member countries will contribute a total of US$100 billion to the bank, to be used as seed capital to finance infrastructure projects.

But that’s not all. In November 2014 China announced the establishment of a US$40 billion Silk Road Infrastructure Fund. It made its first investment in April this year, a US$1.65 billion hydropower project in Pakistan, part of the broader investment in Pakistan mentioned above.

The aim of the Silk Road Infrastructure Fund is to increase capacity and boost connectivity across the Eurasian and Australasian regions, via land and sea.

You’re probably starting to see now that the scope of this project is massive. This is going to reshape the global economy in the decades ahead, and shift the balance of power away from the US and towards China.

I go into more detail on this shifting dynamic in my special report on the topic, which you’ll get in your inbox tomorrow. Suffice to say, China is taking a very different approach to the US in its rise to global economic dominance.

China doesn’t want the same role as the US currently has. It doesn’t want to police the world and it doesn’t want the yuan to be the world’s reserve currency. It knows that by the US dollar fulfilling this role for decades, it has created huge distortions and imbalances in the global economy…and speculative and fragile financial markets.

I’ll expand on all this tomorrow. For now, understand that trade based infrastructure is the big emerging trend in the global economy right now.

I’ll be honest. I’m pretty bearish on a lot of things; central banks have turned stock markets into casinos, politicians around the world are myopic fools, savers are sacrificed to help the debtors…I could go on and on.

But I am bullish about China’s attempts to redraw the global economic map. Trade-based infrastructure investment is productive investment. Productivity is the driving force behind economic growth, jobs, and wealth creation.

Yes folks, we’re heading into a ‘Golden Age of Infrastructure’. The Asian region will see hundreds of billions of dollars in infrastructure investment in the years to come.

Yes, this is a positive for commodities. But resources aren’t the main game this time. There’s another sector set to dominate. The competition for work will be fierce, but there are a few Aussie companies ideally placed to benefit from this emerging new trend.

To find out more about how to play this trend, keep an eye out for my special report tomorrow.


Greg Canavan+,
For The Daily Reckoning


Riaz Haq said...

#Pakistan’s Biggest IPO planned in 8 Years. Steelmaker to raise 4 billion rupees. http://bloom.bg/1AykBAV via @Business #CPEC

Pakistan Prime Minister Nawaz Sharif’s push to build power plants, roads and rail links is prompting a local steelmaker to expand by selling shares in the nation’s biggest initial public offering in eight years.
Amreli Steels Ltd., the South Asian country’s biggest maker of steel bars used in construction, plans to raise as much as 4 billion rupees ($39 million) next month from the sale of 70 million new shares. The proceeds will help more than double its capacity to 450,000 tons from 200,000 tons, Amreli’s director Hadi Akberali said in an interview.
The steelmaker is betting on a potential boom in demand for the alloy as the $232 billion economy expands at the fastest pace in eight years, fueled by higher remittances and consumer spending. Last month, China signed deals for $28 billion of investments in Pakistan as part of a planned $45 billion economic corridor that includes power plants and dams.
“When your GDP is growing, your steel demand grows in multiples,” Akberali said. “If the Pakistan-China economic corridor takes off, even if we double or triple our capacity, I think it still won’t be enough.”
Second Best
Amreli’s share offer also comes amid gains in the benchmark Karachi 100 Index, which, according to data compiled by Bloomberg, is the world’s second-best performer in the past six years. The gauge may rally 52 percent in the next two to three years, Stockholm-based Tundra Fonder AB fund manager Shamoon Tariq predicted in an April interview.
The benchmark index fell 0.3 percent to 32,749 as of 11:36 a.m. in Karachi. This year, it has climbed 2 percent.
The company will raise between 2 billion rupees and 4 billion rupees, depending on the final price, Akberali said, adding he expects strong demand. AKD Securities Ltd. and Bank Alfalah Ltd. will be the advisers on the transaction.
A 4 billion-rupee IPO would be the biggest in Pakistan since Habib Bank Ltd. raised 8.1 billion rupees in 2007, according to data compiled by Bloomberg. The number of initial share offerings rose to five in 2014, the most in six years, according to data compiled by Bloomberg.
“This clearly shows companies have the confidence to raise funds through the equity market,” said Muhammad Imran, a fund manager at NBP Fullerton Asset Management, which oversees 57 billion rupees in stocks and bonds in Karachi. “A new listing will also improve the depth of the market and choices.”

“We are looking at big infrastructure spending,” Akberali said. “Steel is very strongly linked to economic growth.”

Riaz Haq said...

#MSCI review: #Pakistan may rejoin emerging markets in 2016

http://tribune.com.pk/story/901134/msci-review-pakistan-may-rejoin-emerging-markets-in-2016/ …

MSCI, a leading provider of international investment decision support tools, said on Wednesday it may reclassify the MSCI Pakistan Index from ‘Frontier Markets’ to ‘Emerging Markets’ next year.

“We will add the MSCI Pakistan Index to the review list for its potential reclassification to Emerging Markets as part of the 2016 Annual Market Classification Review,” MSCI said.

Global institutional investors use different MSCI indices — such as frontier, emerging, China and US markets – to create balanced portfolios aimed at generating maximum returns while keeping in view their overall risk appetite.

The decision may appear to be a routine reclassification of economies by MSCI, but it has the potential to dramatically change dynamics of the Pakistan equity market: MSCI Emerging Market Index is tracked by global funds worth about $1.7 trillion, according to Bloomberg data.

“Not only the size of passive fund flows will increase, many large Emerging Markets funds may return to Pakistan,” says Topline Securities investment analyst Muhammad Tahir Saeed about the possibility of the elevation of the MSCI Pakistan Index to Emerging Markets next year.

In its brief commentary on the decision, MSCI said most accessibility criteria of the Pakistani equity market meet the MSCI Emerging Markets standards, except for some potential issues with the stability of the institutional framework.

“The Pakistani equity market has grown significantly and its liquidity has greatly improved. As a result, concerns about the potential for failing to meet size and liquidity criteria should there be a negative market event have receded,” MSCI noted.

Pakistan was part of the MSCI Emerging Markets between 1994 and 2008. However, the temporary closure of the Karachi Stock Exchange in 2008 led MSCI to remove it from the Emerging Markets and classify it as a “standalone country index”. MSCI made Pakistan a part of the Frontier Markets Index in May 2009 and it has remained as such since then.

The indexer says the MSCI Pakistan Index may potentially see its number of constituents decrease in the event of its reclassification to the Emerging Markets status. The reason for the reduction in the number of constituents is the application of more stringent ‘investability’ requirements for the MSCI Emerging Markets Index.

Pakistan currently has as many as 16 companies in the MSCI Frontier Markets Index, namely Engro Corporation, Fatima Fertilizers, Fauji Fertilizers, Habib Bank, Hubco, Indus Motor, K-Electric, Lucky Cement, MCB Bank, National Bank, OGDC, Pakistan Oilfields, Pakistan Petroleum, PSO, PTCL and United Bank.

Read: Weekly review: KSE-100 drops 703 points after insider trading probe

Based on a simulation using current data, MSCI believes the number of constituents will decrease from 16 to only six in the case of the possible reclassification. The removal of 10 companies from the index will result in a drop of 32% in its market capitalisation.

Notwithstanding the immediate drop in the index market capitalisation, the possible reclassification is expected to attract greater foreign inflows to the Pakistani equity market. “Although Pakistan’s weight in the Emerging Markets will be small, (the size of) funds tracking Emerging Markets is many times higher than (that of) funds tracking the Frontier Markets,” Tahir said.

Riaz Haq said...

Pakistan In Line For Upgrade to Emerging Market Status

Index provider MSCI has revealed it plans to consider upgrading Pakistan from frontier- to emerging-market status next year.

Citing “a number of positive developments over the course of the past 12 to 18 months,” MSCI said it would include Pakistan on its 2016 review list.

News that Pakistan is being considered for inclusion in the MSCI emerging markets index will be seized upon by a government desperate for international recognition of what it says are its achievements in stabilizing the Pakistani economy.

The government of Prime Minister Nawaz Sharif, who came to power in June 2013, inherited low growth, high inflation, a foreign-exchange reserve crisis and crippling electricity shortages. Since then, inflation has dropped sharply and foreign exchange reserves are more comfortable.

The government is now on a mission to boost economic growth from the anemic 3% that it inherited to around 7% by the end of its five-year term. The IMF expects GDP growth to hit 4.3% this year and rise to 4.7% in 2016.

Pakistan has already achieved recognition among frontier-markets analysts, including Renaissance Capital, which describes the country as “the best undiscovered investment opportunity in emerging or frontier markets.”

However, considerable challenges remain. The country is woefully short of electricity, for example, while plans to seriously boost the paltry tax revenues are also yet to come to fruition.

Tax revenues currently stand at around 10% of GDP.

The IMF, which rescued Pakistan with a $6.6bn loan program in 2013, agrees that progress is being made. The multilateral said last month that “strong implementation of reforms… will transform Pakistan into a dynamic emerging market economy.”

Pakistan is banking on help from China, which has a $46bn investment plan intended to address the country’s energy deficit and put in place other infrastructure for industrialization that it is hoped will change Pakistan’s economic trajectory.

The Karachi stock market has delivered stellar performance in recent years. Since the May 2013 election, it has gained more than 70%. News on the possible inclusion in the emerging markets index—a decision on that will be made by MSCI next year—had little immediate impact on the market on Tuesday.

Pakistan was last in the MSCI emerging markets index in 2008 and brokers said its re-inclusion would be positive.

“Not only size of passive fund flows will increase, many large [emerging markets] funds may return back to Pakistan,” Karachi brokerage Topline Securities said in a note on Tuesday.


Riaz Haq said...

#Pakistan To Enter #MSCI #EmergingMarkets Index. #CPEC http://seekingalpha.com/article/3972823-pakistan-likely-enter-msci-emerging-markets-index?source=tweet … $VWO $EDC $EDZ $SCHE $IEMG $EMF $MSF $EEV $EUM $ADRE $EET


Pakistan likely to be added in MSCI Emerging Markets Index.

P/E multiple re-ratings on the cards; discount to regional peers likely to narrow down.

Economy moving forward on a positive track. CPEC - the real game changer.

MSCI is considering reclassifying the Pakistani equity market from frontier to emerging market status on June 14th, 2016.

MSCI - a leading provider of research-based indexes and analytics - announced that it will release on June 14, 2016, shortly after 11:00 p.m. Central European Summer Time (CEST), the results of the 2016 Annual Market Classification Review. As a reminder, three MSCI Country Indexes are currently included on the review list of the 2016 Annual Market Classification Review: MSCI China A and MSCI Pakistan Indexes for a potential reclassification to Emerging Markets and MSCI Peru Index for a potential reclassification to Frontier Markets.

It is important to note that MSCI is not the only index provider that classifies markets but is considered the reference benchmark for many markets. MSCI and other index providers base their market classification on a number of quantitative measurable and comparative criteria while aiming to avoid qualitative and/or subjective criteria.


Pakistan is a country with a population of 190 million people. Pakistan's GDP stands at USD 250 billion (Year 2015). Pakistan's economy continued to pick up in the fiscal year 2015 as economic reform progressed and security improved. Inflation markedly declined, and the current deficit narrowed with favorable prices for oil and other commodities. Despite global headwinds, the outlook is for continued moderate growth as structural and macroeconomic reforms deepen.

Selected economic indicators (%) - Pakistan 2015 2016 Forecast 2017 Forecast
GDP Growth 4.2 4.5 4.8
Inflation 4.5 3.2 4.5
Current Account Balance (share of GDP) -1.0 -1.0 -1.2
Source : Asian Development Bank


China Pakistan Economic Corridor (CPEC) is a mega project of USD 46+ billion, taking the bilateral relationship between Pakistan and China to new heights. The project is the beginning of a journey of prosperity for Pakistan and China's Xinjiang. The economic corridor is about 3,000 kilometers long consisting of highways, railways and pipelines that will connect China's Xinjiang province to the rest of the world through Pakistan's Gwador port.

Riaz Haq said...

#Pakistan #ETFs In Focus On Growing Prospects. #CPEC #China #FDI #FII http://seekingalpha.com/article/3975926-pakistan-etf-focus-growing-prospects?source=tweet … $FM $FRN $PAK

Pakistan represents an untapped Asian market for U.S. investors. The country's equity market had a bad start to 2016, thanks to the global sell-off and foreign investment outflow primarily from the oil & gas sector.

However, the country is working on a turnaround. Its economy is growing at a decent rate of approximately 4.5% per annum. As per a California software company, NetSol Technologies (NASDAQ:NTWK), the country's 190 million population, with more than 50% being under 25 years of age, could also act as a key catalyst to long-term growth.

In a review of Pakistan's economic program, the IMF positively stated that the country is on a growth trajectory and is expected to benefit from low oil prices and strong investment due to the implementation of the China-Pakistan Economic Corridor (CPEC). The aim of CPEC is to boost Pakistan's infrastructure and its industrial sector.

However, as a caveat, we would like to remind investors that like many other frontier markets, Pakistan is also fraught with political tensions, which might hurt the stock market's potential to outperform at any given time. Additionally, stocks in frontier markets in developing countries generally have smaller market capitalization and lower levels of liquidity than those in large emerging markets. So, investors planning to invest in this market should have a relatively high risk tolerance.

Keeping these points in mind, we highlight the sole ETF tracking Pakistan - the MSCI Pakistan ETF (NYSEARCA:PAK). This ETF looks to track the MSCI All Pakistan Select 25/50 Index, which holds about 37 securities in its portfolio. The fund charges 92 basis points a year. The portfolio is heavy in financials, at 31% of assets, while basic materials (28%) and energy (20%) round off the top three. The top three companies of the fund have almost one-third exposure. The fund has total assets of $5.4 million, with paltry volumes of 3,000 shares. It has gained 6.3% so far this year as of April 29, 2016.

Investors can also consider other ETFs like the Guggenheim Frontier Markets ETF (NYSEARCA:FRN) and the iShares MSCI Frontier 100 Index ETF (NYSEARCA:FM) having significant exposure of 10.2% and 10%, respectively, to Pakistan (see Broad Emerging Market ETFs here).


FRN seeks to match the performance of the BNY Mellon New Frontier DR Index. BNY Mellon defines frontier market countries based on GDP growth, per capita income growth, inflation rate, privatization of infrastructure and social inequalities. With 62 stocks in its basket, the fund has about 43% of assets in the top 10 companies, while financial services has the highest exposure at 42%. With total assets of $38.8 million, it has average volume of 25,000 shares and an expense ratio of 71 basis points. FRN has returned 4.6% so far this year.


FM, holding 107 stocks, is based on the MSCI Frontier Markets 100 Index. The fund has AUM of $16.9 million and trades in average volumes of 388,000. The fund is well diversified, with none of the stocks holding more than 4.7% weight except the top one with 6.3%. Financials dominates in terms of sector exposure, accounting for a whopping 50.2% of total assets. The fund charges an expense ratio of 79 basis points. It has lost 1% in the year-to-date period.

Riaz Haq said...

#MiddleEast #investment bank EFG-Hermes commences operations in #Pakistan

KARACHI: After a gap of nine years, a foreign brokerage house has commenced operations in Pakistan ahead of the country’s reclassification to the MSCI Emerging Markets Index, a development expected to generate the inflow of millions of dollars this year.

EFG-Hermes, a Cairo-based leading investment bank of Middle East and North African (MENA), has opened its office in Pakistan through the acquisition of a majority (51%) stake in Invest and Finance Securities Limited (IFSL).

EFG-Hermes Group Chief Executive Officer Karim Awad said the bank was operating in nine major countries in the MENA region, including UAE, Qatar, Saudi Arabia and Oman.

“Now, we are very proud to be in Pakistan. This is a market full of potential,” he said after ringing the opening bell to begin the trading session at the Pakistan Stock Exchange (PSX) on Monday.

Pakistan upgraded to MSCI Emerging Markets Index

He said PSX’s return to the MSCI Emerging Markets is set to attract significant foreign inflows. “We believe we can play a good role in bringing foreign inflows from western institutions and GCC countries to Pakistan’s stock market, as well as hopefully bring new IPOs [Initial Public Offerings] from local companies,” Awad said.

“We are quite bullish on Pakistan’s economy and that’s why we are here,” he told The Express Tribune.

Foreigners leave

Foreign brokerage houses including JP Morgan, a US bank, suspended brokerage services in Pakistan about nine years ago when trading at the PSX (the then Karachi Stock Market) was suspended following the 2008 crisis.

The US bank still holds PSX membership, but it has remained dormant since then.

Cairo-based firm wants to sink teeth in Pakistan’s brokerage industry

EFG-Hermes Pakistan (earlier known as IFSL) Chief Executive Officer Muzammil Aslam said the investment bank acquired 51% stake in IFSL at Rs15 per share, translating into a transaction of $1.5 million.

“The brokerage house may bring a large part of foreign inflows of around $200-250 million of the total inflows this year,” he said.