Shanghai Stock Exchange to Buy 40% Stake in Pakistan Stock Exhange

[Riaz Haq]

The Shanghai Stock Exchange has submitted a letter of intent to buy up to 40% stake in the Pakistan Stock Exchange, according to  report in The Nikkei Asian Review.  The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.

In August this year, Bloomberg News reported Shanghai Electric's US$1.6 billion for 66% stake in K-Electric, Karachi's main electric utility.

Multinational Acquisitions in Pakistan: 

In July 2016, two multinational giants acquired 2 Pakistani companies as part of their growth strategy to establish presence in Pakistan.

Dutch dairy giant FrieslandCampina acquired 51 % of Karachi-based Engro Foods Limited, the second largest dairy producer in Pakistan.

In the same week in July, Turkey's Arcelik announced purchase of Dawlance, Pakistan's market-leading home appliance maker.

Both cited opportunity for double-digit growth in the emerging market as the main reason for their acquisitions.

Shanghai Bourse's Bid: 

If the Shanghai Bourse's bid succeeds, it will represent the first purchase of a stake in a foreign stock exchange by a Chinese bourse.  In June, global index provider MSCI upgraded Pakistan to emerging markets status while keeping Vietnam as a frontier market, because the former has much better market liquidity.

The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.

Pakistan Top Performing Market in Asia:

As of Sept 30, 2016, KSE100 index, the PSX's key stock index, has  gained almost 24 percent year to date making Pakistan the best performing market in Asia. Vietnam and Indonesia follow with returns of 18% and 16.8%, respectively, while India’s Sensex Index has gained only 6.7%.

Year-to-date, the Global X MSCI Pakistan ETF (PAK) has gained 21.7%, according to Barron's Asia.

PSX official Ayyaz Afzal told The Nikkei Asian Review that "Shanghai is one of two stock exchanges who submitted us letters of intent (to acquire PSX stakes)".

The other bidder is a bourse in the Middle East. Afzal said the PSX could receive additional letters of intent by December, and "before March 2017, I think there will be some positive news about the strategic investor," he said.

A total of 576 companies are listed on the PSX, with an aggregate market cap of slightly higher than 8 trillion rupees (US$80 billion), according to Nikkei Asian Review. Pakistan, the world's sixth most populous nation, is home to some 190 million people. Its economy in 2015 was the globe's 41st largest, at $270 billion.

ADB Pakistan Forecast: 

The Asian Development Bank (ADB) has recently raised Pakistan's economic growth forecast for fiscal year 2017 (from July 2016 to June 2017) from 4.8% to 5.2%. The Bank also sees brighter outlook for the the entire South Asian region. However, the prospects of even a limited India-Pakistan war could derail the economies of the entire South Asia region. I hope that sanity will prevail in New Delhi to tone down its war rhetoric, abstain from escalation and maintain the current economic momentum.

Summary:

Pakistan's economic recovery is in full swing with double digit growth in multiple industries, including auto, pharma, chemicals, cement, fertilizers, minerals, etc.  It is expected to pick up steam over the next several years with new investments on the back of China-Pakistan Economic Corridor related projects. Prospects of even a limited war in South Asia could derail the economies of the entire region. I hope that sanity will prevail in New Delhi to abstain from escalation and maintain the current economic momentum.

Related Links:

Haq's Musings

ADB Raises Pakistan GDP Growth Forecast

Is Pakistan Ready For War With India?

India's Israel Envy: Surgical Strikes in Pakistan?

Growing Middle Class in Pakistan

Rising Energy Consumption

China-Pakistan Economic Corridor

Pakistan's Thar Desert Sees Development Boom

Gwadar vs Chabahar Ports

[Riaz Haq]

#StandardAndPoors 500 Index Funds Outperform 99% of Actively Managed #US #equity funds. https://www.ft.com/content/e139d940-977d-11e6-a1dc-bdf38d484582 … via @FT

Amin Rajan, chief executive of Create Research, the consultancy, said: “These numbers are scary. Active managers need a root and branch look at their investment processes to retain their relevance in today’s surreal investment landscape.”

According to the analysis, 99 per cent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006. Almost 97 per cent of emerging market funds have underperformed.

Daniel Ung, director of research at S&P Dow Jones Indices, said: “The figures are startling.”

Asset management experts believe the findings will exacerbate investor concerns about overpriced, underperforming active funds, and will ultimately push investors into cheaper indexed and exchange traded funds.

Stewart Aldcroft, senior adviser on the Asian fund industry at Cititrust, the fund services business of Citigroup, the US bank, said: “The S&P figures have become a massive boon for the ETF industry, which has been able to use them to show the benefit of passive investing.

“The active industry has built a whole range of arguments against [S&P’s statistics], but until they start to consistently achieve better returns, they will continue to be on the back foot.”

Last week politicians and consumer protection groups questioned the integrity of Europe’s €13.3tn asset management industry at an event specifically convened to look at the role of the asset management market.

Attendees at the meeting, held at the European Parliament and organised by Sven Giegold, a Green MEP, accused investment houses of overcharging their clients and failing to put investors first.

Mr Giegold, who co-organised the event with Sirpa Pietikäinen, an MEP from the European People’s party, said that “high costs” were hurting investment returns.

Assets managed in passive mutual funds, which provide lower-cost exposure to markets by tracking an index, have grown four times faster than traditional active products since 2007, according to Morningstar, the data provider.

Assets held in passive mutual funds have grown 230 per cent globally, to $6tn, since 2007. However, assets held in active funds total $24tn.

[Riaz Haq]

World's top performing #Pakistan bourse to sell 40% stake for $225m. 17 prospective buyers include #Brits #Chinese http://bit.ly/2hd55Wp 

Karachi: Pakistan’s main bourse is to sell a 40 per cent stake next week, a company official said on Friday, citing Chinese and British consortia as among the prospective buyers.
At least 17 entities have expressed an interest in the Pakistan Stock Exchange (PSX), whose benchmark stock index was one of the best performing indices worldwide in 2016, gaining 38 per cent so far.
The PSX is currently owned by more than 300 Pakistani brokers.
“We are opening bidding for the 40 per cent share of the PSX on December 15,” Shahzad Chamdia, chief of a PSX divestment committee, told AFP.
Analysts estimate the deal will be worth around $225 million (Dh826.2 million), but the committee declined to comment.

“We have the reference share price being evaluated by a third party and will reveal it only on the bidding day,” Chamdia said.
Sources at the PSX said a consortium consisting of the Shanghai Stock Exchange, the Shenzen Stock Exchange and a Chinese fund is bidding, as well as another consortium of UK financial institutions led by Nasdaq Technology.
Chamdia did not reveal the names of either consortia but confirmed that Chinese and British stock companies were in the running.
Other bidders include Pakistani banks and financial institutions, but their chances of winning are thought to be unlikely.
Following the sale, the company plans to offer 20 per cent of its shares to the public, Chamdia said.
Under its stock exchange reforms, Pakistan merged its three stock exchanges — the Karachi Stock Exchange, the Lahore Stock Exchange and the Islamabad Stock Exchange — to form the PSX in January this year.
The benchmark KSE index of 100 shares was at its highest ever level of 45319 points on Friday, compared with 32816 points on January 1. 

[Riaz Haq]

#Asia’s top-performing market #Pakistan's #PSX to see 7-8 new listings in 2017. #KSE100
http://tribune.com.pk/story/1265718/pakistan-bourse-asias-best-perf...

KARACHI: Asia’s best-performing market, the Pakistan Stock Exchange (PSX), is expected to see seven to eight new company listings in 2017 through the issuance of shares to general public in initial public offerings.

“The companies that will make the initial public offering (IPO) will be from sectors like packaging, transportation, real estate investment trust, insurance and auto vendors,” said Shahid Ali Habib, Chief Executive Officer of Arif Habib Limited.


“At least four of the expected IPOs are in our hands; these are expected to be launched by June 2017; we cannot disclose their names according to regulations,” he said.
In addition to this, the government is also in the process of getting State Life Insurance Corporation (SLIC) listed on the stock exchange.

The making and breaking of records at the PSX suggested that more companies would come to the exchange to raise interest-free funds in IPOs in a bid to develop new projects or expand their ongoing businesses, he said.

In the current calendar year, three new companies were listed on the PSX. Two of them were Hi-Tech Lubricants and Loads Limited. In the year to date, the market’s benchmark KSE 100-share Index has advanced by over 40% to 46,584.53 points.

Market outlook

Habib anticipated that a lot of positive happenings in the economy would support the benchmark index advance to 55,500 points by the end of December 2017. “Pakistan’s equity market will potentially generate a yield in the range of 17% to 21% in 2017,” he said.

The bourse will continue to record strong returns in CY17, an assessment supported by the brokerage house Arif Habib’s price-to-earnings ratio (PER) re-rating hypothesis.

“Currently, the market is trading at a CY17F PER of 9.1x (multiples), a discount of 22% and 34% to the MSCI Emerging Market and Asia-Pacific region, respectively,” he said and expected the equity market to go up to 9.7x in 2017.

All you need to know about the PSX divestment

Factors supporting the upward trend include reclassification of Pakistan into the MSCI Emerging Market from the MSCI Frontier Market, double-digit earnings growth for listed companies (16.5%), attractive valuations, a strategic foreign investor acquiring a big stake in PSX and flush of liquidity from divestment to brokers (in the range of $90-100 million), continuing economic growth (5.1% in FY17), Chinese investment in Pakistan’s energy and infrastructure worth $55 billion by FY17-18 and political maturity.

According to Habib, brokers are expected to re-invest the $90-100 million in equities, which will provide additional support to the market.

He said the low interest rate scenario had created huge liquidity in the system and a big part of it was expected to land in the share market.

Local investors have so far invested $450 million in the market. The trend is expected to continue in 2017.

Foreigners to invest $300-400m

Habib said foreign investors had so far sold stocks worth $230 million at the PSX in 2016, as fund managers in the MSCI Frontier Market were pulling out ahead of Pakistan’s upgrading to the MSCI Emerging Market in May 2017. They are expected to return after Pakistan’s reclassification.

He anticipated that foreigners would invest in the range of $300-400 million in 2017 against selling in 2016. At present, foreigners are holding shares worth $6.5-7 billion at the PSX.

[Riaz Haq]

#Pakistan Stock Exchange says #China-led consortium (#Shanghai, #Shenzen bourses) bid highest 4 #PSX. #CPEC http://www.wsj.com/articles/pakistan-stock-exchange-says-chinese-co... … via @WSJ

A Chinese-led consortium, including the Shanghai Stock Exchange, emerged as the top bidder Thursday for a 40% stake in the Pakistan Stock Exchange, one of the best-performing markets in Asia this year.

The Pakistan Stock Exchange, formerly the Karachi Stock Exchange, said the consortium includes three Chinese exchanges: the China Financial Futures Exchange as the lead bidder, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange. The consortium also includes two Pakistani financial institutions: Pak China Investment Company Limited and Habib Bank Ltd.

The consortium’s winning offer, subject to regulatory approval, of 28 rupees ($0.27) per share values the stake at $85.5 million, and the exchange at $213.7 million.

The Pakistan Stock Exchange has been one of the best-performing markets in Asia this year, with its benchmark KSE 100-stock index gaining 42% this year. MSCI announced in June this year that it will upgrade Pakistan, earlier classified as a frontier market, to include it in its Emerging Markets Index.

The sale of the 40% stake is “big news not only for us, but also for the country,” said Shehzad Chamdia, chairman of the Pakistan Stock Exchange divestment committee. “I think it will be a game changer for our capital markets.”

Mr. Chamdia said the consortium’s offer is structured so that the three Chinese exchanges will have 30% of the exchange, while the two local partners will have 5% each. Along with board seats, the consortium will also get to nominate the CEO and CFO at the exchange, Mr. Chamdia said.

Pakistan has seen major Chinese investment in recent months, especially under the China-Pakistan Economic Corridor, a multibillion-dollar infrastructure program to upgrade the land route between the two countries and also boost Pakistan’s energy generation capacity.

Separately, China’s state-owned Shanghai Electric Power Co. acquired a controlling stake in K-Electric, the power utility in Karachi, Pakistan’s largest city.

Prime Minister Nawaz Sharif’s government considers boosting foreign investment a key pillar of its plan to revive Pakistan’s economy, and has pointed to the performance of the country’s stock exchange during his tenure as a sign of economic progress.

[Riaz Haq]

#China investment brightens #Pakistan’s future. #PSX #KSE #CPEC https://www.ft.com/content/6fa73c2a-33f2-11e7-99bd-13beb0903fa3 … via @FT


Late last year, three Chinese exchanges jointly submitted the highest bid for a 40 per cent stake in the Pakistan Stock Exchange. They paid almost Rs9bn, or $85m. Weeks after the deal, the market hit an all-time high.

This year has been a good time to be a broker in Karachi, especially after index provider MSCI announced last summer it was restoring the country to emerging market status after downgrading it to frontier status after the financial crisis. In March, local brokers with stakes in the PSX received cheques when the Chinese transaction closed. Since then, they have been sending roadshows to financial capitals to sing the praises of the Pakistani market.

The Chinese investment in the the Pakistan stock market is not officially part of the China Pakistan Economic Corridor (CPEC), which is itself part of the broader, One Belt, One Road initiative designed to strengthen trade links between China and Europe. Yet the biggest reason to be optimistic about Pakistan is the Chinese investment that is pouring into the country.

More than $55bn is expected to come into the country in the next five years, according to a forecast from the Pakistan Business Council. Beijing is doing for Pakistan what the country cannot seemingly do for itself — provide functioning infrastructure. The most critical of these involves building power plants to solve the country’s perennial energy shortage, which has become one of the biggest constraints on economic growth.

Last year investors latched on to what Chinese investment might mean for Pakistan. The stock market is up more than 40 per cent over the past 12 months, and touched a record high in January. However, its momentum has slowed, rising only about 3 per cent this year.


Investors must decide whether China will be a long-term game changer for corporate Pakistan — or whether China itself will be the biggest beneficiary of CPEC. Will local steel, cement and heavy chemical companies see a huge uptick in orders? Will Chinese capital invest in the Pakistani cement and steel industry, where being local is an advantage given high transport costs. Or will Chinese companies see a boost to revenues as a result of Chinese investment?

“With the China connection, it is difficult to go wrong; that is key,” argues Mark Mobius, executive chairman of Templeton Emerging Markets Group. “Three years ago, we went big in Pakistan when everyone was down on it.”

Yet the evidence so far is mixed. Many contracts are not public, but Chinese companies that have received contracts to help construct some of the power plants have been guaranteed equity returns from the projects. Moreover, until the Pakistani business community rose in revolt, Chinese steel imports were duty-free.

Chinese investment is not the only reason to buy Pakistan. Law and order has improved, although progress seems fragile. Growth, which came in at under 5 per cent last year, is expected to rise to 5.2 per cent this year, according to the Asian Development Bank. Consumer spending is strong. The cost of capital is at a 43-year low, according to data from the Pakistan Business Capital. Pakistani management talent — whether at multinationals such as Unilever or local companies such as Engro or National Foods — is impressive.

But reasons to be bearish are not hard to find. The country’s exports are declining, while those at competitors such as Vietnam and Bangladesh are growing. Manufacturing as a percentage of GDP is shrinking, and is a mere 13 per cent today. Remittances are down, while the balance of payments is under pressure.

The wave of Chinese investment will make a huge difference to Pakistan. That much is not in dispute.

But it is possible that alongside the power plants, roads and ports, China’s investment will leave a trail of bad debts. For now, of course, Karachi brokers will be hoping Beijing’s interest lifts the domestic stock market to new highs.

[Riaz Haq]

Dr. Jawaid Abdul Ghani, a professor at Karachi School of Business Leadership, has recently analyzed household surveys in India and Pakistan to discover the following:

1. As of 2015, car ownership in both India and Pakistan is about the same at 6% of households owning a car. However, 41% of Pakistani household own motorcycles, several points higher than India's 32%.

2. 12% of Pakistani households own a computer, slightly higher than 11% in India.

3. Higher percentage of Pakistani households own appliances such as refrigerators (Pakistan 47%, India 33%), washing machines (Pakistan 48%, India 15%) and fans (Pakistan 91%, India 83%).

4. 71% of Indian households own televisions versus 62% in Pakistan.

http://www.riazhaq.com/2017/05/comparing-ownership-of-appliances-an...

[Riaz Haq]

#Pakistan’s growing economy attracting #Turkish investors, companies. #CPEC #China

https://tribune.com.pk/story/1413442/pakistans-growing-gdp-attracti...

ISTANBUL / TURKEY: 

Pakistan’s growing Gross Domestic Product is becoming an attraction for Turkish companies as they scout for investments in the country, said Foreign Economic Relations Board of Turkey General Secretary Mustafa Mente.

“The potential of Pak-Turk relations is much more than what the bilateral trade volume suggests,” Mente told The Express Tribune.

Pakistan is among the first three countries when it comes to initial visits for any elected government of Turkey, he said.

“The good news is that many Turkish companies now have their presence in Pakistan and the country’s rising GDP is fast becoming an attraction for them to look for more business avenues,” he added.

Mente said the entire South Asian region, which includes Pakistan, India and Bangladesh is unique due to its huge population, almost 1.7 billion, and would be a choice for Turkish companies to invest.

But he said distance and cost of travelling will remain issues.

“We are also facing the same issue when it comes to the US markets, though there are a lot of opportunities for SMEs and other such businesses.”

Pakistan and Turkey are also in negotiation to finalise a Free Trade Agreement to boost bilateral trade. As per the Pakistan Business Council, the current level of bilateral trade between the two countries is $584 million, which has potential to go up to $5 billion.

Currently, Pakistan’s exports to Turkey stand at $391 million, whereas Turkey’s exports amount to $193 million.

In recent years, few Turkish companies have invested directly in Pakistan, particularly in Punjab, but that is more due to the government’s urge to replicate some Turkish models in the provincial capital.

The prime example is of Albayrak that is currently providing its services in transportation and waste management sectors. Some private groups have also invested directly in the electronic goods segment primarily to cover the region due to the upcoming China-Pakistan Economic Corridor, which will connect the region via rail and road links.

Mente said that currently negotiations are under way for Foreign Direct Investments in textile sector particularly in fabrics and yarn; however, some technical issues remain unresolved.

“Both sides are interested in investing in the textile sector but we have to find common ground,” he said, adding that he was hopeful that the level of Turkish investments in Pakistan as well as Pakistani investments in Turkey will rise across all sectors including health and tourism.

[Riaz Haq]

‘Growing debt market crucial to Pakistan’s economic progress’

https://www.thenews.com.pk/print/760808-growing-debt-market-crucial...

Growing and dynamic debt market is crucial for the economic progress of Pakistan and it is imperative for all stakeholders of the financial ecosystem to take the country’s debt market to regional and international levels, PSX chief executive officer said on Friday.

Farrukh Khan, chief executive officer of Pakistan Stock Exchange (PSX) said this during a gong ceremony to welcome Bank of Punjab (BOP) onboard as a market maker for conventional and shariah-compliant debt instruments on PSX.

“BOP is one of the first banks to become a market maker on PSX. We welcome this development as this will lead to increased growth and dynamism in the debt market, which is crucial for the economic progress of Pakistan,” Khan said in a statement. “We believe this step will play a significant role towards achieving that end. We are also in discussions with BOP to bring some of their SME [small and medium enterprise] clients to list on the new GEM [growth enterprise market] board. This will also be an important development for Pakistan’s economy, the SME sector and PSX.”

Market makers perform the role of providing liquidity and depth to the market by facilitating investors to buy and sell securities through continuously quoting two way prices – bid and offer prices.

Zafar Masud, CEO of Bank of Punjab said the bank will be the first bank in the Pakistan market making for both conventional and shariah-compliant securities as well as corporate debt instruments at the PSX portal.

“This makes us the first public sector bank offering a bouquet of services in collaboration with PSX,” said Masud. “We see our role expanding beyond a market maker for debt securities. Through this agreement, we are committing to becoming a leading player in development of capital markets in Pakistan by enabling greater investor participation and enabling listing of more debt, equity and non-conventional instruments at PSX.”

“We can partner with PSX in promoting privatisation and listing of public sector projects for example Punjab thermal power and Quaid-e-Azam solar power through the stock exchange. Moreover, we plan to design instruments to bring projects like Kamyab Jawan Program, SME financing project and low cost housing scheme to PSX platform,” he said.

[Riaz Haq]

Production of home appliances soars

https://www.dawn.com/news/1629800

KARACHI: Easing of lockdown and rising heatwave have caused a sharp rise in production of home appliances with refrigerators hitting a 32-month high in April, followed by 19-month high in air conditioners and 22-month in deep freezers.

Production of refrigerators during April soared to 131,953 units from 6,996 units in April 2020 while in March the production was 119,535 units, showed Large-Scale Manufacturing (LSM) data.

Production of air-conditioners soared to 62,953 units in April as compared to 5,246 units in April 2020 while in March the production stood at 35,418 units, showing a jump of 78pc MoM.

Deep freezers sales also saw a strong rebound, rising to 11,732 units in April 2021 from 1,048 units in April 2020 while March 2021 production stood at 7,236 units.

According to a financial analyst at a brokerage house, demand for electrical goods is rising after tapering off the Covid-19 led lockdown which is much evident from LSM figures of April. Production of other power sector electrical goods such as electric transformers and meters production also witnessed strong rebound in April.