Is It Time to Invest in South Asia Again?

With political instability, rising inflation and economic slowdown, many investors are fleeing South Asian markets. India's Sensex is down 48% and Pakistan's KSE-100 is down 40% this year. Most of the rest of the world's emerging markets dropped, too— Shanghai lost 44 percent, Russia, down 25 percent, and Brazil, 36 percent. They're fighting inflation and their slingshot growth has eased. To investors, it looks like a no-go zone.

As far as Pakistan is concerned, a little less than seven years ago, immediately after the Sept. 11 attacks on U.S. cities, few sane investment advisers would have recommended Pakistani stocks. In hindsight, they should have. As Western governments have fretted about the resurgent Taliban or Pakistan's nuclear weapons falling into the hands of militants, the Karachi Stock Exchange's main share index has risen more than 8-fold, in spite of the recent troubles and KSE-100's major decline this year.

Is it time again for a counterintuitive idea? Put money gradually into emerging market mutual funds over the next six to 12 months, says analyst Peter Perkins of BCA Research in Montreal, according to Newsweek. These stocks aren't optional anymore. Anyone who sees the future has to own them.

As Jane Bryant Quinn, a popular personal finance adviser, puts it in Newsweek: Put aside the idea that developing countries live on the fruits of cheap labor and raw materials. On the contrary, they're home to world-class corporations with innovative management, superior technology and global reach. To mention just three: Embraer, the top small-jet manufacturer (Brazil); Samsung Electronics, a worldwide brand (South Korea), and Infosys Technology, for IT services (India). "The countries in the former Third World will become the dominant economies of tomorrow," says Antoine van Agtmael, president of Emerging Market Management and author of "The Emerging Markets Century."

Jane Bryant Quinn concludes her recent Newsweek column with the following advice: If emerging markets are good for geezers, where have the crazies gone? To funds invested in "frontier markets": Nigeria, Kazakhstan, Pakistan, Croatia and the Arab Gulf states. Today, these stocks ride the political winds. In the future, they'll be in our children's IRAs.

Protests Erupt as Karachi Stocks Hit New Lows

The investor confidence reached new lows when hundreds of irate investors took to the streets in Karachi today. A number of windows were broken and at least two people injured, Reuters news agency reported. They were protesting continuing slide in share prices in Karachi for the 14th consecutive day, eroding about 14% of capital since Monday, reaching a new 18-month low of 10,058.37. The KSE-100 is now down 36% from its peak of 15739.25 earlier this year. Fall of 20% or greater in major indices is considered a bear market.

Earlier in June, there was a brief respite for investors when the authorities imposed a temporary ban on short selling and tightened the circuit breaker lower limit to 1% and increased upper limit to 10%. But, as the limits were revised to plus or minus 5% last Friday, many investors took advantage of it and sold off their holdings, putting further downward pressure on share prices.

"The measures taken on Friday proved to be an exit strategy for foreign investors," Asad Iqbal, managing director at Ismail Iqbal Securities Ltd. told Business Recorder newspaper in Karachi.

Pakistan's State Bank has recently raised interest rates from 10% to 12.5% and cut 2007-8 growth from 7.2% to 5.8%. This forecast comes on the heels of dire talk of economic "meltdown" by the new leadership that is facing serious political instability amid growing differences in the PPP-PML(N) coalition government. The ongoing unease with new leadership is continuing to accelerate loss of confidence in Pakistan's economy by businesses, investors and consumers. The rupee is continuing its slide which has seen it lose 16.9% of its value against the dollar so far this year.

With the dramatic rise in international commodity prices, the food and fuel subsidies have contributed to Pakistan's rising budget deficit, which the central bank said would reach 6.5 percent to 7 percent. The deficit was just 4.3 percent in fiscal 2007. With imports rising faster than exports, the central bank said Pakistan's current account deficit will rise between 7.3 percent and 7.8 percent - a record high.

While it is true that at least part of the inflation in Pakistan is imported from global markets, it is important for the Pakistani leadership not to use it as an excuse for inaction on the economic front. Faced with international turmoil, it becomes even more important to assert leadership in economic matters to keep the national economy afloat and able to recover quickly in the future. The first step toward fixing the current mess is to put credible economic leadership in charge and stop the erosion in business, consumer and investor confidence.

Karachi Stocks in Engineered Rally

Pakistan's KSE-100 index has gained more than a thousand points in two days bringing it back above 12000 points but still well below the 15739.25 reached on April 21. The latest rally was triggered by several joint measures by the Securities and Exchange Commission of Pakistan and the Karachi Stock Exchange. The measures included a 1-month ban on short selling, a special 30 billion rupee ($446 million) fund set up to stabilize volatility, and revision of the short circuits to 10% on the upside and 1% on the downside.

The new measures could reduce the downside while "creating incentives for the KSE-100 to increase," said Khalid Iqbal Siddiqui, head of research at Invest & Finance Securities, speaking to the Wall Street Journal.

Some 78 companies of the 650 listed on the KSE gained close to the new limit of 10% on Tuesday. Among those that jumped 10% were Oil & Gas Development, National Bank of Pakistan and Lucky Cement.

While there is short-term euphoria in response to the SECP and KSE actions, there is concern that fundamental issues of political stability and confidence in economic growth will likely assert themselves, bringing this rally to an end.

The recent market drop has come as the political situation has become uncertain since February elections. A fractious coalition led by the PPP is in power, and many observers say the country is adrift.

Pakistan Stocks Continue to Defy Gravity

As growing concerns about the state of the US economy took their toll on share prices in Asia, the Karachi stock market continued its rally and KSE-100 touched a new peak of 15,085.18 points level during last week ending on March 8, 2008.

"The signs of formation of coalition government of PPP, PML (N) and ANP have revived investors' confidence and they have once again started investment in the share market, which pushed the index to new high level," analysts said, according to The Business Recorder, Pakistan's Financial Daily.
The KSE-30 index went up by 239.90 points, to close at 18,607.19 points level from 18,367.29 points.

Market capitalization jumped to a new peak of Rs 4.661 trillion from Rs 4.618 trillion, an increase of Rs 42.465 billion. Average daily trading volume of ready market stood at 285 million shares, while overall some 1.294 billion shares were traded during the week.

On Friday, the Indian market closed in the deep negative territory with the BSE Sensex closing below the psychological level of 16000 and the NSE Nifty settled below the 4800 mark. The market tumbled since the initial bell tracking the news from the global markets and remained in the negative territory throughout the trading session. Also, the rising of inflation to 5.02% in February 2008 added to the negative sentiments in the market. The inflation grew to nine months high due to rise in prices of fruits, vegetables and oil seeds. The BSE Sensex closed lower by 566.56 points at 15,975.52 and NSE Nifty fell by 149.80 points to close at 4,771.60. We expect that the market may remain volatile during the trading session.

The markets in Tokyo, Taipei and Shanghai did not fare any better. The Nikkei and other indexes in Asia were in negative territory. The stock market in Shanghai fell by 3.59% to a seven month low on continued inflation worries.
Taiwan's benchmark Taiex index fell 2.7%, which was its biggest fall for six weeks.

In spite of the KSE-100 defying gravity seen in the rest of Asia and the world, there is still a big cloud hanging over the market with the expected transfer of power in the next few weeks. Any hint of serious confrontation between the new government and President Musharraf could easily erase all the stock market gains and pull the KSE-100 into deep negative territory.

Pakistan Stock Index Hits New High

The KSE-100 closed at an all-time high of 14829.58, continuing the bullish trend after February 18 elections. The buying was spurred by hopes raised by the announcement of PPP and PML(N) agreeing on forming a coalition government.

According to Pakistan's Financial Daily "Business Recorder", the overall market capitalization reached an all time high of Rs 4.606 trillion with a net increase of Rs 41 billion. Healthy trading activity was seen at the share market as the market volume significantly increased to 397.695 million shares as compared to 359.151 million shares traded a day earlier. The futures market turnover however slightly declined to 51.615 million shares against 56.592 million shares previously.

The rally witnessed strong institutional buying coupled with foreign buying. The strong earnings announcements brought buyers in the share market. The investors' expectations for better political situation in days ahead encouraged them to take fresh positions.

There were concerns regarding possible confrontation with President Musharraf, causing the KSE-100 index to close well below the session’s high of 14,957.48 .
Pakistan's Dawn newspaper quotes an analyst as saying,“Quit Musharraf demand by the PPP and the PML-N leaders seems to have put a brake on market’s upward thrust, the perception that the president’s denial to oblige them could lead to a showdown triggered selling.”

Karachi Investors Shrug Off Election Jitters

Stock Investors Bullish
As the world holds its breath for the February 18 voting in Pakistan, the stocks continue to surge with major Pakistani companies posting record profits. The KSE-100 rose for the fourth day closing up 70 points at 14,353. Pakistan State Oil Company Limited, the largest state owned oil marketing company in the country has achieved a record profit before tax of Rs 8.2 billion and profit after tax of Rs 5.5 billion in the first half of financial year 2007-08 with 13% increase in sales volume. Shares buyback by a number of listed companies including Ahmad Spinning Mills, Sarhad Cigarettes and Noon Textiles inspires confidence that the share prices are likely to continue the uptrend.

External Debt Rises
Pakistan's external debt rose by US$2.4b to reach a new high of US$42.9 during July-Dec 2007. As a percentage of GDP, however, it declined to 26% from 27% at the end of FY2007 ending June 2007. The total debt-to-GDP ratio is 57%, helping Pakistan maintain its Moody's and S&P credit ratings of B1 and B+, the same as Indonesia's but a notch below India's debt rating of BBB. Pakistan current debt rating is about 5 levels below the top investment grade of AAA but it is the best Pakistan has ever achieved.

Post-Election Scenarios
"Formation of a stable democratic government will be the most important event to consider," said Mark Mobius, executive chairman at Templeton Asset Management Ltd talking with Reuters. "Investors are still keen on Pakistan and there has been no sharp withdrawal of capital from Pakistan despite the recent events as well as the financial turmoil across the world," Mobius said. "In fact, markets in Pakistan have been fairly resilient."
I believe investor confidence, company profits, and debt ratings can change dramatically based on the realities on the ground. If the February elections go well, and there's little or no violence in the aftermath, then we can hope for a continuation of the current positive trends. Whoever wins will need to reassure investors on the continuity of economic policies to retain investor interest in Pakistan. If there is post-election violence and it gets out of hand and there is prolonged uncertainty as to the new government, then all bets are off.