Frontier Markets & Pakistan's Equity Market Rocks

In CY10, frontier markets, in aggregate,  performed better than developed & emerging markets.

	3MTD*	CY10
MSCI World Index	6.8%	8.6%
MSCI Emerging Market Index	5.2%	14.9%
MSCI Frontier Market Index	5.3%	19.0%
*13 Oct 2010-13 Jan 2011
Source: MSCI

I have ranked countries by their performance in equity market, during past 3 months. Interestingly, Top 4 countries equity performance in past 3 months belongs to MSCI Frontier Markets & 10 out of top 15 countries in the world, also belongs to MSCI Frontier Markets .

Pakistan’s equity market performed really well in the past 3 months, ranked 3^rd in the world.

Rank	MSCI Country Index	3MTD*
1	UKRAINE	38.0%
2	KAZAKHSTAN	22.6%
3	PAKISTAN	20.8%
4	QATAR	17.4%
5	RUSSIA	17.0%
6	KOREA	15.2%
7	TAIWAN	15.2%
8	SERBIA	14.8%
9	NIGERIA	14.6%
10	CROATIA	13.6%
11	ESTONIA	12.8%
12	JAPAN	12.2%
13	OMAN	11.3%
14	VIETNAM	10.0%
15	USA	8.6%

*13 Oct 2010-13 Jan 2011

Source: MSCI

Now, ready for big surprise….

Pakistan’s equity market performed the highest in 3MTD & YTD in Asia & Pacific region, in comparison to developed, emerging & frontier markets.

MSCI Indices	YTD*	3MTD**
FRONTIER MARKET INDEX	1.6%	5.3%
FRONTIER MARKET ASIA INDEX	-2.2%	4.0%
BANGLADESH	-8.9%	-7.9%
PAKISTAN	5.3%	20.8%
SRI LANKA	1.9%	1.3%
VIETNAM	-0.5%	10.0%
EMERGING MARKET INDEX	1.0%	5.2%
EMERGING ASIA INDEX	1.2%	5.4%
CHINA	4.1%	0.9%
INDIA	-7.4%	-6.9%
INDONESIA	-5.7%	-9.1%
KOREA	3.7%	15.2%
MALAYSIA	5.0%	6.8%
PHILIPPINES	-3.4%	-8.5%
TAIWAN	0.8%	15.2%
THAILAND	-0.1%	3.8%
WORLD INDEX	2.0%	6.8%
PACIFIC INDEX	1.4%	9.3%
AUSTRALIA	-1.7%	4.2%
HONG KONG	5.0%	7.3%
JAPAN	2.2%	12.2%
NEW ZEALAND	2.2%	6.0%
SINGAPORE	1.9%	4.8%

*1 Jan 2011-13 Jan 2011 **13 Oct 2010-13 Jan 2011

Source: MSCI

The main reason for the Pakistan’s performance & continued foreign interest which specially surge in 3MTD is due to Pakistan’s cheap valuation.

Pakistan’s valuation is the cheapest in Asia region [Bloomberg, 13 Jan 2011]

Another phenomena, which i have noticed in countries belong to frontier market is, macro events can have disproportionate effect on performance of index/ earnings of blue chip companies. 

US Aid to Pakistan

Pakistan’s government & establishment heavily rely on US aid.

US gives Pakistan 2 kinds of aid, overt & covert, which further divided into security related & economic related.

Few believes that covert US aid to Pakistan is also substantial, mainly security related. Though, we don’t have numbers to second it.

In past couple of years, aid on account of Coalition support fund (CSF), Pakistan Counterinsurgency Fund (PCF) & Economic support fund (ESF) immensely increased.

In FY11, Security related aid to Pakistan is expected to increase greatly which is mainly reimbursement to military while economic related aid may decrease, marginally, which is in actual an aid for Pakistani people & impact positively.

Direct Overt US Aid & Military Re-imbursement to Pakistan
USD mn	Annual Average FY2005-2009	FY10	FY11F
Total Security Related	1,382	2,276	3,165
::change		65%	39%
Total Economic Related	578	1,621	1,565
::change		180%	-3%
Total Aid	1,960	3,897	4,730
::change		99%	21%

Source:  U.S. department of State & Defense, 4 Jan 2011

FY means US fiscal year (1^st Oct-30^th Sep) 

Cotton for Onion

The Indian side has conveyed to the Pakistani counterparts that it was ready to revisit the cotton export ban and ceiling issues, if the gesture is reciprocated by Pakistan through the removal of the ban on the movement of onion. Link

Decision on onion export ban likely today by Minst. of Commerce.

Pakistan's textile industry has been badly hit by the suspension of cotton exports by India. 

If cotton export from India re-opens for Pakistani buyers then it will be positive for downstream textile makers but at the same time onion price in Pakistani market will increase. India will gain through onion price respite.

US: Private Employment data for Services Industry rose the most in Dec-2010, since 2000

Services Industry Employment:
According to the ADP Report, employment in the service-providing sector rose by 270,000 in December 2010 , the eleventh consecutive monthly gain and the largest monthly increase, since 2000.




It's nearly three times what economists forecast and the biggest jump on record for ADP.


Goods Producing Sector Employment:
Employment in the goods-producing sector rose 27,000 in Dec 2010, the second consecutive monthly gain and the largest since February 2006.


Manufacturing Sector Employment:
Manufacturing employment rose 23,000 in Dec 2010, also 

the second

consecutive monthly gain.  

US: Non-Manufacturing Index (NMI) climbed the most in Dec-2010 since Jan-2008

US's NMI is recorded 57.1% in December 2010, increased by 3.8% M-o-M, highest since January 2008. 


Expansion in Dec 2010 is seen 12th consecutive month. 


A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

Source: ISM

Currency Carry Trade Strategy, lost the most in 2010

USD appreciation in 2010 invokes the biggest risk in "Currency Carry Trade" that tumbles the UBS V24 Carry Index 2.5%, the most in 2010, since the inception of index in 1999.

UBS V24 Carry Index includes 24 currencies, including G-10, Emerging Europe, Asia, South America and Africa

Source: UBS

US - Purchasing Managers Index (PMI

United State's Purchasing Managers Index (PMI), a key gauge of economic growth & factory output , rose for the 17th successive month in December 2010.

Source: Institute of Supply Management (ISM)

A PMI over 50% indicates that the Manufacturing Economy is generally expanding while anything below 50% suggests that the economy is contracting.

PMI data also suggest that Overall Economy, grew 20th consecutive month, as PMI in excess of 42%, generally indicates an expansion of the overall economy

Pakistan: EFS & LTFF - How much increase in offing, to fill the Gap?

Export Refinance Rate:

Under IMF condition, EFS rates are linked with weighted average yields of last three auctions of 6 months T-Bill.

Current EFS rate: 10.00%

Current weighted average yields of last three auctions of 6 months T-Bill: 13.39%

Deadline to comply is September 2011, therefore SBP will jack up EFS rate sharply (approx 300 bps) this year to fill the gap at current W.A. yield of last 3 auctions of 6 mo. T-bill.

Long Term Financing Facility (LTFF):

Under IMF condition, LTFF Re-finance rates (for a period of 3-10 years) are linked with 3,5 and 10-year PIBs' weighted average yield of last 2 auctions.

	up to 3 yrs	3 yrs -5 yrs	5yrs-10yrs
Current LTFF	9.50%	8.60%	8.20%
Current W.A. yield of last 2 auctions of respective PIB’s tenure	14.0%	14.13%	14.13%

Deadline to comply is September 2011, therefore SBP will jack up LTFF rates sharply (approx 450bps – 550bps) this year to fill the gap at current W.A. yield of last 2 auctions of respective PIB’s tenure.

At the end of FY10, outstanding amount under EFS is PKR 178bn (2% Y-o-Y increase in FY10), while, outstanding amount under LTFF is PKR 43bn (13% Y-o-Y increase in FY10)

Increase of EFS & LTTF rate will be negative for all exporters, mainly for Textile & Rice exporters.