Investor Q&A:
Naween A Mangi
Q: I read a column in Fortune Magazine this week which said a US company called Calpers had put Pakistan in its list of countries not to invest in. How does that jive with all the noises out of Islamabad and even from Karachi Stock Exchange officials that the KSE-100 is a superb investment? — Jahangeer N. --Karachi
A: Calpers, or California Public Employees’ Retirement System is a pension fund in the US with $133 billion in assets under management. It’s the country’s largest public pension fund and invests a small portion of its funds, about $1.6 billion in emerging markets. Last year, they had a company called Wiltshire Associates grade various countries around the world based on financial factors, transparency, political stability and labour practices. When the scoring was complete, Calpers pulled money out of Indonesia, Malaysia, the Philippines and Thailand. And a bunch of countries including India, Jordan, Morocco, Sri Lanka, Colombia, China, Egypt, Pakistan, Russia and Venezuela were put on the no-list. Calpers had the survey repeated this year and Jordan was upgraded to acceptable. The Fortune columnist says that the economies of many countries on the prohibited list are in lousy shape. He also says he wouldn’t be surprised if these banned countries’ markets continue to outperform the markets Calpers likes. Now, there are several issues at hand. First, it is possible that Pakistan made it into the prohibited list based on political instability. The logic for that is obvious. However, as far as financial factors and transparency are concerned, the massive improvements in corporate governance over the past two years cannot go unnoticed. And corporate governance and transparency are supposedly issues very close to Calpers fund managers’ hearts. It is surely safe to say that corporate transparency and indeed corporate performance of companies listed in Pakistan are above par. Then, if Fortune Columnist Andy Serwer has included Pakistan in the list of lousy economies, (he hasn’t specified whether he has) he should do his homework. Sure, Pakistan is nowhere close to even having any sort of a definitive plan to become a middle income country, but lousy can no longer be used to describe this economy. A combination of good luck and reform has meant the economy has stabilized with external debt rescheduled, capital inflows coming in and the currency turning stable. Then, the data shows that the KSE has been the best performing market not just in 2002 but year-on-year in 2003 so far as well. To be sure Calpers missed out on the 2002 gain of 112 percent in the KSE-100 Index. Even still, the index offers an average dividend yield of 10.6 percent, which clearly beats returns elsewhere in the world. So the facts speak clearly for themselves. The economy is stable. And the market is a good buy. But Calpers decision may be based on other factors like political and regional stability. And obviously, it’s their decision to trade off high returns for what is perceived to be higher risk. But that doesn’t mean investors right here cannot cash in. Happy investing!
Q: For weeks before the war began, analysts were cautioning that once conflict breaks out, the market will see some fall, at least. Instead, the KSE-100 index has rallied more than 100 points since the war broke out. Isn’t war and uncertainty supposed to send markets tumbling? I’m utterly confused! —Hafiz Rizvi --Karachi A: You’re not the only one! A lot of market watchers’ jaws have dropped in the last two days of trade this past week as bombs fell and the market shot up. That’s why if you’ve seen analyst reports at the tail end of this week, they sound more like jumbled mumbles than concrete analysis. So the pros are probably pretty confounded too. However, it’s interesting to note that the Karachi market is not out of whack. This past week was the US Dow Jones Industrial Average’s best week since 1982 with a rise of 8.4 percent or 662 points. The logic on Wall Street is that US investors were simply betting on a swift victory in Iraq. So in share trade on Friday, every bit of pro-US news coming out of Iraq was sending investors scurrying to the buying counters. Despite President Bush’s warnings that it could be a prolonged conflict, share investors weren’t buying into that line of thought and placed their money on a short, swift war with a clear victory for Washington. Here at the KSE, there was a different dynamic at work. First, worries that the onset of a US, UK invasion would bring MMA supporters out onto the street resulting in city disruptions and violence, were quashed when life continued as normal in Pakistan. No street power of any significant magnitude was stirred up and the calm gave the market a real boost. Then, Pakistan’s seemingly neutral position also gave market players a feeling of security that aid flows would continue uninterrupted. So in a sense the presence of positive factors stirred to life the market which had turned somewhat depressed since the badla crisis of Jan 15. But individual investors must tread with special caution at this time. Indeed, uncertainty and war turns markets volatile at the very least, even if it doesn’t send them tumbling. If the market consolidates early in the week, then things should remain steady. But if this bullish fever persists, the badla rates could begin to snake up once more and that could spell trouble for the market. So far, it appears the buying has been mostly speculative. But if it continues and retail investors start pouring in, the badla market could begin to show signs of strain. Already, badla rates which were at record lows of around 5 percent prior to this week, edged up to 8 percent by Friday. So that’s something to watch out for.
Do you have a question about how to invest your money? Or do you wonder how economic events affect your savings? Write to us at naween@dailytimes.com.pk or fax us at 021-5657362. Please include your name and address.