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In this article, I will apprise investors about the recent developments in Pakistan having a material impact on the price on the Pakistan ETF (NYSEARCA: PAK ). I recommend readers to read this article in tandem with my previous articles: Pakistan: An Undiscovered Land of Opportunities and Pakistan: Impending Growth Story. Pakistan is an oil importing country that is immensely benefiting from the recent plunge in oil prices. It has been a blessing for its economy in the following ways: CPI (Consumer price index), which is being calculated monthly by Pakistan Bureau of Statistics , has been on the downward trajectory, increasing the purchasing power of ordinary Pakistanis. In addition to that, in line with the decline in inflation number (which is one of the primary indicator SBP considers), State Bank of Pakistan (SBP) slashed the interest rate to a historical low of 6.5%. However, due to lower base effect the CPI numbers have started going up but within the range of moderate inflation. I believe interest rates would remain constant in the upcoming MPS (Monetary Policy Statement). Nonetheless, I foresee 50bps increase in the fourth quarter of the current year. Click to enlarge Prices of petroleum products in Pakistan have not gone down in sync with international crude oil price. This is because the oil and gas sector is heavily regulated by the government of Pakistan, which has levied high indirect tax in order to increase its indirect sources of revenue, bridging a gap of fiscal deficit. Narrowing fiscal deficit is one of the prime conditions of IMF as Pakistan is in IMF program since 2008 due to its incessant and growing current account deficits. Now the situation has improved as Pakistan’s current account deficit has narrowed by 23% , with shrinking fiscal deficit cloaking in at 1.7% of GDP as compared to 2.4% in the same period last year signaling improvement in the chronic structural problem of Pakistan’s economy. Other developments include: a) Approval of the much-awaited five-year Auto policy . This policy would bode well primarily due to phased reduction in duties by 5%-2% for existing players in the market coupled with tax incentives for new investments by existing and new brands in the market. Automobile companies constitute ~3.2% of the PAK ETF. b) Cement sector is rallying with bullish sentiments propelled by strong local demand and margin accretion due to increased construction activity and lower input prices respectively. Moreover, although the FIPI (Foreign Indirect portfolio investment) is negative year to date but cements are attracting foreign indirect portfolio investments with a positive contribution of USD 18.3 mn month to date. Cement companies constitute 14% of the PAK ETF. The following graph depicts sector-wise foreign portfolio investment of the month of February 2016. c) Recent rally in oil prices has reinvigorated the interests of investors in the Oil and Gas sector; this week oil and gas index outperformed the benchmark index. In recent weeks, the OGTI index surged by 2.5% against 1.26% increase in KSE-100. In conclusion, I would again reiterate that PAK is an investment opportunity that is high risk and high return but better for the diversification of your portfolio along with other regional ETFs. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News