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Pakistan: The Growth Story Continues

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.

Factor-Based ETFs Provide Increased Stability, Returns

During a volatile market climate where ETFs are especially getting hit hard, an increased utilization of factor-based investing has the opportunity to provide more stable and higher returns. Factor-based investing allows investors to increase exposure to certain factors, including size, value, quality and momentum. Last year, MSCI introduced a variety of multi-factor indexes that offer investors a better strategy that could be just right for this market environment. These indices cover US, World, Emerging Markets, and more. Click to enlarge The 1 year return of the MSCI US Momentum Index (NYSEARCA: MTUM ) distinctly outperformed iShares Russell 1000 Value ETF: Click to enlarge (Source: Bloomberg) A Focus on Momentum Momentum-based investing has proven to be a successful strategy in a volatile market climate, as seen with AQR’s posted returns in their liquid alternative funds. Such a strategy can provide returns in a downed market as well because the strategy works both ways. A hedge fund can short a portfolio of negative momentum securities and vice versa. For MSCI with their new diversified multi-factor indices, it’s all about choosing the right exposure to multiple factors, not just momentum. They’re targeting four main factors (listed above), including momentum. The MSCI USA Momentum Index didn’t perform well in the past year (-8.04%), but the MSCI diversified multi-factor indices have seen much better returns. MSCI is able to increase or decrease their exposure to certain factors that they see as favorable or unfavorable. Such optimization is extremely strategic as risk level of the underlying index is maintained. These multi-factor indices aren’t brand new strategies, either. The MSCI World Diversified Index returned an annualized 9.8% over a 16-year period during backtests, which is double the return of the regular MSCI World Index. The main methodology is to increase factor exposures to achieve higher historical returns. Which Factor is the Best? With the recent sell-off and market environment that is arguably a mess, what is the right factor to increase exposure to? With the MSCI World DMF index, which has one tilt towards value, there was a positive exposure to earnings yield even in this market. There is no one best factor, which is the point of these indices. A combination of multiple positive exposures with tilts towards different factors (momentum, size, value, quality, leverage, etc.) is what has made these MSCI products produce better returns than the run-of-the-mill ETFs. For example, the MSCI World DMF Index had positive exposure to stocks of lightly levered companies, lower residual volatility and smaller size: (SOURCE: MSCI ) The above described strategies for ETFs is something investors should make note of as clearly alternative strategies are needed in this market situation. Consistent optimization of diversified multi-factor products, like those of MSCI’s, are not completely immune to risk, but have now proven to have broken away from the poor performance of regular ETFs in the past year. Factor-based investing is very optimal for this market is a very forward-thinking investing strategy. 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.

Too Far, Too Fast? Market Professionals Reflect Evolving Smart-Money Opinion

How good have their forecasts been? Figure 1 is the record of five years of daily forecasts for ProShares UltraPro Dow30 ETF (NYSEARCA: UDOW ), an ETF that holds derivative securities which are intended to magnify the daily percentage price changes in the DJIA index by a factor of 3 times, either up or down. Figure 1 tells what the Market-makers daily hedging-implied forecasts for UDOW over the past 5 years have produced as net profits for a wide range of imbalances between upside and downside prospects. Those imbalances are measured by the Range Index [RI] which tells what percentage of the whole forecast range lies below the market quote at the time of the forecast. Figure 1 also indicates how often the forecasts were able to produce a profitable outcome, operating in a realistic, time-constrained portfolio management discipline. Click to enlarge So what did MMs see earlier, see now? Here is the current picture of probable coming UDOW prices, along with similar once-a-week forecasts over the past 2 years. Figure 2 (used with permission) The vertical lines of Figure 2 are the price range forecasts for UDOW implied by the MM community’s hedging actions to protect firm capital exposed during buyer~seller balancing to “fill” volume trades. The forecast of 5 weeks ago was from a then-price of $46.54 and a Range Index of -11. Now it has a quote of $64.72 and a Range Index of 57. A week ago the price of $59.49 carried a RI of 51. Figure 1 suggests that buys of UDOW at today’s RI level of 57 in the past might produce only a +2% payoff from here, instead of the upwards of +12% that had been experienced by -11 Range Index forecasts earlier. The +2% prospect is reinforced by the row of data in Figure 2 as the actual payoff experience achieved in 108 of the 1261 days for which UDOW forecasts were available. Forecasts that had RIs of around 57. The current forecast is more optimistic than past experience; it projects a potential gain of +5.6% Odds for reaching the current payoff prospect remain high, with priors producing a profit in 84 of every 100 among the 108 experiences. The fact that gains better than three times the earlier forecast’s average payoff already have been experienced makes one wonder if the “other shoe might drop” any time now and markets might start to back off. To ease such concerns, it is appropriate to know as UDOW prices were rising during this past week, its MM expectations rose faster. The outlook gains pulled back RIs which on a couple of days were at 68. Continued rising expectations, at a gain rate faster than prices, will put strength under a continued market price rise, albeit at a slower pace. Failure to do so may signal weakening market enthusiasm. We’ll have to see what happens. It can be monitored on blockdesk.com., along with expectations for the VIX index and VIX-based 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.