The Financial Daily
October 2010
GST on Services Goes to Provinces EU Grants Trade Breaks SBP Monetary Policy Budget Makeover
Cover Story
UN SEEKS RECORD $2BN FOR PAKISTAN
Mutual Funds in August 2010 Funds in Focus Stocks in August 2010 International News Reviews Analyses Articles Comments
INVESTORS’ GUIDE
Acknowledgements Publisher & Editor-in-Chief Amir A. Ashary Editor Shakil H. Jafri Executive Editor Manzar Naqvi Assistant Editors Raheel Amer Tanzeel-ur-Rahman Senior Research Analyst Aqeel Abdul Razzak Graphic Designer Noman Nisar Cover Page Design M. Imran Sharif Price: 70/Head office 111-C, Jami Commercial Street 11, Phase VII, DHA Karachi Telephone: 92-21-5311893-6 Fax: 92-21-5388428 Email Address: editor@thefinancialdaily.com URL: www.thefinancialdaily.com Lahore office 24- Peshawar Block, Fortress Stadium, Lahore Telephone: 92-42-6675595 Fax: 92-42-6664349 Email Address: editor@thefinancialdaily.com URL: www.thefinancialdaily.com
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CONTENTS Editorial Rising e-payments & Remittances Budget Makeover UN seeks record $2bn for Pakistan SBP raises key rates by 50bps EU grants trade breaks Performance of KSE100 in August 2010 Performance of Mutual Funds in August Khi stock mkt ends 1Q weaker Performance World stocks New IPO Funds in Focus Performance of Regional indices Floods Provide Banks Opportunity Make rich pay up Ogra to fix LPG prices MTS at KSE doorstep, knocking Four Fresh Funds fail to further MFs size ADB sees agriculture snap-back in 2-year KSE in IPO drought Aid at-the-ready Tax more, Get more From OGDC to Adiala Jail TAPI Gas Deal Fatal to Textiles Banks set to comply codes Govt ploughs more in agri fields Pak, Italy ink Rs3bn debt swap agreement PSAF, Now An Open-end Fund Karachi Port to get WB's $115.8 million Sindh ready to raise one-off ratable-tax Going Green Company & Industry News Why people bankrupt? Corruption, Inflation stand in way of business Risk & Return CSR & mutual funds Pakistan Railway (Urdu) LPG Project (Urdu) SBP Circulat Debt (Urdu) Petroleum Sector (Urdu) Tax Culture (Urdu) PSDP Cut E-Payments
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Disclaimer
All reports and recommendations have been prepared for your information only. Summary and Analysis are not recommendation to buy or sell. This information should only be used by investors who are aware of the risk inherent in investments. The facts, information, data, indicators and charts presented have been obtained from sources believed to be reliable, but their accuracy and completeness cannot be guaranteed. The Financial Daily International and its employees are not responsible for any loss arising from use of these reports and informations.
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Editorial Energy at large If Pakistan's energy needs are thoroughly met it would go a long way in boosting the business in quite a lot of respects. We have plenty of options to choose from in this regard. The biggest of our industries i.e. textiles, the rich warp & the woof of our exports; fertiliser makers, the nourishers of agrarian GDP; cement manufacturers, the binding force of economy, if provided plenty of uninterrupted supplies of affordable energy could leap & bound with the springboard of competitiveness. A stronger business cycle would positively impact the whole of the economy. We also need to reduce our energy import bill in the same breath. This would give investors a spur for investment as they await good news like expansion, new IPOs, promising products, and improved law-order-political picture to open their wings. Sometimes a lesser evil is better than the best. Let's find out what it is? Now, growing energy shortage has become the biggest hurdle in boosting Pakistan's GDP growth rate. An acute shortage of locally produced crude oil has kept the country heavily dependent on natural gas. But demand surpassing gas supply is forcing the country to explore new options for overcoming this constraint. Partly the problem pertains more to mismanagement of resources, rather than any supply limitations. To overcome these Pakistan has three options: 1) increasing exploration and production activities, 2) containing UFG of gas marketing companies, and 3) import of LNG. To overcome the supply constraint in the short-term, gas marketing companies will have to reduce UFG losses. In addition to this, litigations regarding some of the recently discovered gas fields have to be resolved. If successfully done the two can add minimum 350mmcfd and maximum 850mmcfd over the next couple of years. The best available option is import of gas through pipeline from Iran. The project has been delayed because of India's foot-dragging under the US pressure. Some of the experts are of the opinion that Pakistan should go ahead with the project without India. One of the suggestions has been to ask China to join the project to let some steam out of US blackjacking. To demolish IPI project the US is promoting TAPI also fully supported by India. One of the Indian concerns regarding IPI plan has been security threats for the pipeline going trough Balochistan. Surprisingly, however, India does not seem concerned about TAPI passing through war-ridden Afghanistan. Availability of this eco-friendly fuel could help ensure full gas supply to existing fertiliser plants. It may be recalled that during FY10 Pakistan imported nearly one million tonne urea eroding country's foreign exchange and adding to already huge subsidy expense. New grass-root fertiliser plants could also follow this development the fruit of which would be ample-indigenous-affordable urea and happy farmers. In the prevailing situation Pakistan should work up LNG terminal on war footing. Though, the cost will be relatively higher compared to a pipeline but supply can be ensured by striking long-term agreement with one of the LNG supplying countries. Enhanced availability of gas would help bring down energy cost of power producers, textiles, and cement makers improving Pakistan's competitiveness in the global markets. Government must give it a “do” without “ado” as it would get the business going even better, and the better the business the happier the investors. Happy Investing
Shakil H. Jafri editor@thefinancialdaily.com INVESTORS’ GUIDE
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Rising e-payments Remittances Last Qtr of FY10: E-transaction up at Rs4.8 trillion
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lectronic payments continued to show a rising trend as both the number and value of such transactions increased in the fourth quarter (April-June) of the last 2009-10 fiscal year (FY10). According to State Bank's fourth Quarterly Report on 'Retail E-Payments and Paper Based Instruments' , the volume and value of e-Payments transactions in the country reached to 53.4 million and Rs4.8 trillion respectively showing an increase of 6.2 per cent in number and 7.7 per cent increase in value. During the fourth quarter of FY10, the volume and value of ATM transactions in the country reached to 31.1 million and Rs250.3 billion respectively showing an increase of 5.9 per cent in number and 7.6 per cent in value as compared to 7.9 per cent increase in number and 10.4 per cent increase in value in the previous quarter. Whereas, the volume and value of real time online banking transactions in the country reached to 17.4 million and Rs4.5 trillion respectively showing an increase of 8.9 per cent in numbers and 7.9 per cent increase in value. According to the report, the total number of Automated Teller Machines during the fourth quarter reached to 4,465 registering a growth of 2.1 per cent. The volume and value of debit cards transactions were reported to 35.03 million and Rs269.40 billion respectively showing an increase of 7.0 per cent in number and 4.8 per cent in value. Similarly, during the fourth quarter of FY10 the volume and value of credit cards transactions were reported at 3.9 million and Rs16.6 billion respectively showing an increase of 8.9 per cent in numbers and 1.7 per cent increase in value as compared to 3.9 per cent decrease in numbers and 4.0 per
cent decrease in value in the previous quarter. In addition, the total number of cards (debit / credit /ATM only) in circulation during the fourth quarter reached to 10.52 million which shows an increase of 0.7 per cent compared to 4.9 percent increase in the previous quarter. Meanwhile, A historic amount of $933.06 million was remitted by overseas Pakistani workers in August 2010 beating the previous of record of $841.44 million received in June, 2010. According to the data, during the first two months (JulyAugust) of the current fiscal year remittances worth $1.724 billion were sent home by Pakistani workers, showing an increase of $198.86 million or 13 per cent when compared with $1.525 billion in the same period last year. The monthly average remittances for the July-August 2010 period comes out to $862.12 million as compared to $762.69 million during the same corresponding period of the last fiscal year, registering an increase of 13 per cent. During the last month i.e. August 2010 remittances from UAE, Saudi Arabia, USA, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $212.55 million, $205.56 million, $186.82 million, $108.55 million, $108.29 million and $29.14 million respectively. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during August 2010 amounted to $82.14 million compared with $95.89 million in the same month last year. It may be pointed out that the State Bank, Ministry of Finance and Ministry of Overseas Pakistanis had undertaken a joint initiative called 'Pakistan Remittance Initiative (PRI)' with a view to facilitating the flow of remittances through formal channels.
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Budget Makeover PSDP maybe cut by 50pc, says Hina Shiraz Ahmed
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he Federal Government has expressed its intention for a makeover of federal budget in view of the catastrophic floods caused huge losses to the country. Minister State for Finance Hina Rabbani Khar informed the Lower House during Question Hour that unexpected and unprecedented floods resulted in huge infrastructure loss that has created enormous challenges for the country's economy, so government has made up its mind to reshape budgetary allocation in order to get more finance for post-flood activities. Planning Commission will not be executing any projects instead of those already under implementation while the matter regarding cutting the Cabinet size was with the Implementation Committee National Assembly was also informed that PSDP may be cut by up to 50 per cent in view of recent floods to divert resources for rehabilitation and reconstruction of affected areas. She said restructuring is more important. We shall have to go for major orientation. However, no new tax shall be imposed without taking this House into confidence though the GST shall be revised from 1st October." The austerity plan approved by the Cabinet is under consideration. Two meetings of the Cabinet Committee
"I cannot give the exact figure about cut in PSDP. But, it may be between 30-to-50 per cent. We are reprioritising and if we shall not do it, we shall be the one to lose," she said on Restructuring have been convened and Pepco will be the first for restructuring, the minister said. She admitted delay in implementation of the decision for restructuring and said, it was due to essence of certain issues with the PSEs of certain institutions ranging from tens of billions to hundreds of billions. To another question, she said, Planning Commission will not be executing any projects instead of those already under implementation while the matter regarding cutting the Cabinet size was with the Implementation Committee.
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DONORS CONFERENCE
UN SEEKS RECORD $2BN FOR PAKISTAN Trade we need, aid we don’t: Qureshi Investors' Guide Report
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he United Nations gathered new aid pledges for the Pakistan flood disaster after making a record two billion dollar appeal to feed millions of victims. Twenty-five top ministers, including US Secretary of State Hillary Clinton, gathered in New York ahead of the UN summit this week, to discuss the new crisis in Pakistan. UN Secretary General Ban Kimoon has called the floods "the worst natural disaster the United Nations has responded to in its 65year history." Norway more than tripled its emergency aid to Pakistan to 66 million dollars. "The situation is still highly critical for nine million people. We must now show our solidarity with the flood victims," said Foreign Minister Jonas Gahr Store, who is in New York. Norway had already pledged 115 million Kroner to the earlier Pakistan appeal and upped this to 400 million Kroner (66 million dollars). India has made an immediate 25 million dollar contribution to its neighbor as soon as the appeal was made. The main world powers have held back from announcing their response to the record UN appeal though. The floods, caused by weeks of torrential rain have killed more than 1,700 people, according to an official toll, but the UN said the massive surge has exposed more than 20 million people to homelessness, malnutrition, risks of epidemics and
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loss of livelihood. UN officials have compared the disaster to the Haiti earthquake and 2004 Asian tsunami even though the death toll is significantly lower.
The UN said money was needed to buy food, set up emergency camps, rebuild agriculture and villages which have seen drinking water and sanitation wiped out.
INVESTORS’ GUIDE
The flood water is still moving from the north of Pakistan to southern provinces causing huge
lars requested by 15 UN bodies will be used to help 14 million people over the next 12 months,
REVIEW than 10 per cent of Pakistan's population spread over an area bigger than 160,000 square kilometers (62,000 square miles). Some 1.9 million homes have been damaged or destroyed. Foreign Minister Shah Mehmood Qureshi said Pakistan wants economic growth in exchange of trade so he urged generous nations to let Pakistan have access to their markets for his country's economic development, media reported. "We need trade more than aid", Qureshi told attendees of a forum. Addressing a Socialist International Forum (SIF) in New York, he said the government was trying to address economic challenges being surfaced by worst ever floods in the history of country.
The previous record emergency appeal made by the UN was the 1.5 billion dollars sought after the Haiti earthquake in January. Eleven billion dollars has been sought in humanitarian appeals this year, which the UN said was the most since they started in 1991. new emergencies. Agencies have warned of a looming health crisis with 709,000 cases of acute diarrhea, almost one million cases of skin disease, more than 800,000 cases of acute respiratory infections and hundreds of thousands of cases of malaria and dengue fever that are spread by mosquitoes. "We simply cannot stand by and watch the immense suffering in a disaster of this scale," said Valerie Amos, the UN under secretary general for humanitarian affairs and emergency relief coordinator, announcing the megaappeal. The more than two billion dol-
the Office for Coordination of Humanitarian Affairs (OCHA) said. The previous record emergency appeal made by the UN was the 1.5 billion dollars sought after the Haiti earthquake in January. Eleven billion dollars has been sought in humanitarian appeals this year, which the UN said was the most since they started in 1991. The UN launched an appeal for 460 million dollars for Pakistan on August 11 and this is now 80 per cent funded, officials said. The new appeal includes this sum. The floods have affected more
He thanked international community for its generous help and donations to deal with such a monstrous challenge. Pakistani people have forged unity among their ranks to help rehabilitate flood-ravaged people, he informed attendees. He urged SIF forum to extend Pakistan access to European markets, which he thinks should be the better way to uplift shattering economy of a flood-ravaged nation. Qureshi also held one-onone meeting with Turk foreign minister to discuss issues pertaining to cooperation in sectors including agriculture and skilled education.
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From EU with trade concessions UK, Germany stand in favour; France opposes breaks to Pakistan textiles Tanzeel-Ur-Rehman
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uropean Union countries agreed to grant trade concessions to Pakistan to help it overcome the impact of floodings and maintain political stability, diplomats said. Pakistan will receive an "immediate and time-limited reduction" in duties on key exports to the European Union, taking into account industrial sensitivities in the EU, notably on textiles, they said. One diplomat said the arrangement would be worth around 300 million euros ($390 mn) to Pakistan over a year. The heads of government and state of the EU, which represent the world's biggest border-free trading bloc and home to half a billion consumers, agreed to grant "significantly increased market access through the immediate reduction of duties on key imports." "It's very important that we provide aid and help to Pakistan by all means possible," said Finnish Foreign Minister Alexander Stubb. "To me it means humanitarian aid, development aid and trade." The details will be determined in the coming weeks, with the European Commission working with the World Trade Organisation to finalise how it would be implemented and ensure trade rules are not violated. The proposal is due to be completed by October, diplomats said. Britain and Germany have pushed the 27-nation European Union to offer Pakistan trade advantages to help the country battle flood devastation while France
opposed the concessions to Pakistan. In a letter to EU partners, British Prime Minister David Cameron called for a "concrete political commitment from the EU to Pakistan to enhance significantly its access to the EU market." On the other hand, French President Nicolas Sarkozy raised objections to opening up Europe's doors to Pakistan trade because of a threat to textiles workers in the Limoges region. Limoges, best known for its porcelain and enamel, is home to a thriving bed linen and carpet industry said to be worth more than 14 million euros a year to the country. But EU officials said that was only a quarter of the value of Germany's textiles trade with Pakistan and only a tenth that of Italy. The issue was just one of a number of allegedly "protectionist" objections raised to plans to speed a special trade deal through in response to the economic plight facing Pakistan. UK Prime Minister insisted the scale of the economic crisis warrants a European response way beyond the vital immediate humanitarian effort already mounted by the EU. And free-trade objections raised at a one-day summit in Brussels were seen as undermining the summit's determination to reflect the EU as an international player. On a trade deal with Pakistan, one UK official at the summit said: "We want a political commitment to find a way to reduce tariffs on Pakistan imports in the near to medium term: we'd like something in a matter of months." Meanwhile United Kingdom Independence Party (UKIP) has slammed French intervention in a potential UK-Pakistan trade deal. "If David Cameron wants to open up free trade with Pakistan to help mitigate the effects of the appalling floods in that country he should just do so" said William Dartmouth, the UKIP trade spokesman today.
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STOCKS
Performance of KSE100 in August 2010
Down but not out Investors’ Guide Research fter some impressive performance in the first month of current fiscal year (+8.20 %), the index failed to sustain the gained levels as, in August 2010, it went down by 6.7% (706 points) to close at 9,813 points. However, this time decline was due to historic high floods which wreaked immense havoc across the country. In addition to that, increase in discount by 50bps and delay in margin financing products has adversely hurt investor's sentiment. Average daily volume for the month dropped to 56.5 million shares as compared to 69 million shares in previous month, down 18.1 per cent MoM. As per NCCPL data, foreign investors have purchased shares worth $41 million in August 2010. During the month, investors remained sidelined having concerns regarding the impact of floods towards economic growth. According to finance ministry, Pakistan's GDP growth has shrunk by almost 2.5 per cent and overall loss to assets is hovering around 6-8 per cent of GDP. The loss of cotton crop is 2.9-3.5 million bales, as per recent estimates, while the rice crop has not been accurately assessed as yet. Sugarcane crop has also been heavily damaged. During the moth almost all the sectors underperformed, however investors remained shy regarding cement & fertilizer offtake after post-flood conditions. Furthermore media reports regarding increase in corporate tax rate have kept investors from buying any stocks. Cement dispatches started with disappointing numbers as floods exacerbated cement demand, which brought the dispatches down by 20% YoY in August 2010. In fertilizer sector urea sales dropped 15% YoY and DAP by a sharp 79% YoY. The drop in sales and post-flood conditions forced urea manufactures to cut price by Rs25/bag. Auto industry started to slow down owing to numerous factors squeezing the demand. Firstly, floods are the biggest visible reason for slowdown in rural segment, secondly buyers are opting to postpone the purchase or shift towards secondary market vehicles owing to unabated increase in new car prices, thirdly deteriorating law and order situation in metropolitan cities with rising car-snatching-stealing incidents, and final reason could be the diminished income anticipated owing to aggravating economic conditions. Over all a few stocks with strong payouts i.e. Hub Power, Pakistan Petroleum, and Fauji Fertilizer did find strong support from high net worth and institutional investors. Going forward, International Monetary Fund (IMF) is keeping a close eye on Pakistan's macroeconomic indicators. However, it has approved $451million emergency funding for reconstruction and rehabilitation. Furthermore, IMF has also forced Ministry of Finance to increase tax to GDP ratio and implement reformed GST in October.
A
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Source: KSE website
Money Market In the first T-bill auction held after discount rate hike on 12th August 2010 rates on all tenures of the papers rose sharply. The State Bank of Pakistan had raised discount rate by 50 basis points to 13% from 12.5% for August - September 2010, due to fiscal and inflation pressures. This resulted in upward pressure in all yields. SBP conducted T-bills auction twice with a total target of Rs160 billion against the maturity of Rs174 billion. However, it accepted Rs196 billion. Cutoff yield for 3 month paper increased by 41bps to 12.5171%, 6 month paper rose by 29bps to 12.69% while yield on 12 month paper rose by 33bps to 12.79%. Maximum participation was been seen in 3M paper where SBP was able to raise Rs164.5 billion (cumulative amount of two auctions) due to uncertainty related to future direction of interest rate. August 2010 July 2010 % Chg 3MT-Bills 12.5171 12.1036 41bps 6MT-Bills 12.6649 12.3707 29bps 12MT-Bills 12.7873 12.4568 33bps Source: SBP August2010 July 2010 % Chg 1M KIBOR 12.80 12.39 41bps 3M KIBOR 12.72 12.33 39bps 6M KIBOR 12.87 12.42 45bps 9M KIBOR 13.19 12.70 49bps 1Yr KIBOR 13.26 12.76 50bps Increase in discount rate and tight liquidity condition forced 6M KIBOR to move upward by 45bps to 12.87 per cent, 1M KIBOR also went up by 41bps to close at 12.80 per cent. SBP had also conducted an auction on 18th August, however, as the market participants bade on a very higher side, SBP had to scarp the auction.
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PERFORMANCE
Performance of Mutual Funds in August
Figures ain’t rosy D Investors’ Guide Research espite the launch of four new funds the Mutual Funds industry lost its size by 1.54% in August 2010 MoM to come down at Rs206.9 billion as compared to Rs210.2 billion in July 2010. Disappointedly, the new funds failed to add to the size of industry as assets under management fell below Rs207 billion. The decline in asset growth was an upshot of a fall in the asset class value i.e. KSE100 index's descent by 6.71% in August. It was primarily for investors suffered from the worst of jim-jams regarding post flood condition expecting an uptick yield curve in discount rate to boot. The delay in leverage product, as well, deepened investor's depression during the month. Open-end funds which make up almost 85.0% of the total mutual fund industry stood at Rs176.41 billion at the end of August as compared to Rs177.8 billion a month earlier, posting a slightly negative growth of 0.82% MoM while close-end category was at Rs30.51 billion, a drop by Rs1.77 billion in absolute terms. Moving towards categories, Income & Money Market Funds registered asset size growth of 1.73% MoM --thanks to ABL Asset Management as it launched two new funds which cumulatively added Rs2.78 billion to the category in the month. The category stood at Rs111 billion in August as compared to Rs109 in July. Equity funds category declined 5.94% to stand at Rs38.79 billion during August 2010 as compared to Rs41.24 billion in July. The other categories --having exposure in equity market-- which posted decline were Islamic equity, Islamic asset allocation, and balanced fund going down by 6.6%, 4.6% & 2.8% MoM respectively.
Categories
Aug-10 Jul-10 (Rs in Bn) (Rs in Bn)
Equity Market Funds
38.79
Income & Money Mkt Funds110.96
% Chg
41.24
-5.94
109.07
1.73
Balanced Funds
4.98
5.12
-2.82
Islamic Funds
4.63
4.96
-6.65
Islamic Income Funds
5.93
6.11
-2.95
Hybrid Funds
6.81
6.86
-0.73
Asset Allocation Funds
1.50
1.48
1.35
Islamic Allocation Funds
2.06
2.16
-4.63
Fund of Fund
0.87
0.87
-0.46
Open End Fund Size
176.41
177.87
-0.82
Closed end Fund size
30.514
32.285
-5.49
210.2
-1.54
Total Mutual fund Asset size206.9
Source: TFD Research & Fund Manager Report
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100-INDEX GAINS 3PC IN FIRST QUARTER OF FY11
A FRAIL FINISH Average turnover at around 62mn shares Investors' Guide Report
K
arachi Stock Exchange remained weak during the first quarter of the fiscal year as it gained just 3 per cent, while an average daily volume reduced to around 62 million shares with declining foreigners' interest. KSE remained the worst performer in the region during the above mentioned period. According to the details, average daily turnover of the exchange during the last quarter stood at around 62 million shares declined by more than 67 per cent from the same period last year. The benchmark index of the exchange too didn't show any major development as it increased by 291 points - 3 per cent during the quarter while it jumped by 2,187 points 30.54 per cent during the same period last year. According to the experts, there are a number of reasons due to which investors remained cautious, that include unavailability of leverage product, imposition of capital gains tax, destructive floods in the country, uncertain political situation, weak economic position, rise in interest rates, delay in IMF tranche, deteriorating law and order situation and tussle between government and judiciary. Farhan Mahmood, analyst at Topline Securities said that besides imposition of newly capital gain tax, delay of IMF tranche, 100bps increase in discount rates and devastation by floods remained the major factors of declining market activity
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as investors were cautious that these factors will increase balance of payments problem, cost of doing business, inflation and budget deficit. He said that the last quarter average turnover was at 9 year low. Our analysis excludes 5 months (Sep 08-Jan 09) market performance during and post-floor rule as hardly any activity was seen as most of the stocks were on lower limits. According to a report by Topline Securities performance of Pakistan market was not good in the outgoing quarter, as it underperformed with other regional markets and indices by posting a meager dollar gain of 2 per cent. Amid liquidity crunch, political and economic issues continue to affect investor's sentiments
in local market that prefer to put money in better yielding fixed income papers. In the outgoing quarter, MSCI world, MSCI EM, MSCI EM Asia posted dollar gains of 13.7, 16.6, and 14.6 per cent respectively. Moreover, after Vietnam, Pakistan market was second worst performer in Frontier markets that posted average gain of 13.3 per cent. Similarly, due to low volumes, activity by foreign investors also decline during 3Q2010. During this period foreigners bought share of $248mn and sold $142mn with net buying of $106mn. Compared to this foreign buying was US$437mn and selling was US$201mn (net buying $236mn) in 3Q2010.
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PERFORMANCE
Equity Funds
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uring August, the benchmark KSE-100 dropped by 6.71%. Equity market funds that track 100--index followed the suit. All the seventeen funds posted negative returns during the month. However, fourteen of them outperformed KSE-100 negative return of 6.71%. Once again, selection of best funds is on the basis of those funds which put up best resistance and declined least. The average return of equity funds was negative 5.64% in August10. Regarding fund performance, Pak Oman Advantage Stock Fund delivered the best risk adjusted return. The fund outperformed average equity return by 190bps and posting a negative return of 3.74 per cent in August. In terms of year to date returns, Atlas Stock Market turned in a return of 4.46 per cent followed by IGI Stock Fund & MCB Dynamic Stock Fund came up with returns of 4.29% and 3.0% respectively. In terms of asset size, the equity fund, which constitutes 22 per cent of the total open-end funds, posted negative growth of 5.93% to come down at Rs38.79 billion in August 2010 as compared to Rs41.24 billion in July2010. Equity-asset-size wise, once again selection has been made on the basis of funds' tenacity or how less they lost, in this regard Alfalah GHP Alpha Fund declined by only 4.3% as compared to average equity asset size fall of 5.93%. Equity Funds August Return (%)YTD Returns (%) Atlas Stock Market Fund -5.44 4.46 IGI Stock Fund -4.28 4.29 MCB Dynamic Stock Fund -5.50 3.00 United Stock Advantage Fund -6.44 3.00 Alfalah GHP Alpha Fund -4.32 2.65 ABL Stock Fund -5.59 2.29 Lakson Equity Fund -5.25 2.25 Crosby Dragon Fund -5.60 2.20 Pakistan Stock Market Fund -5.00 2.12 HBL Stock Fund -5.22 1.95 KASB Stock Market Fund -7.08 1.16 National Investment Trust -7.76 0.94 Pak Oman Advantage Stock Fund-3.74 0.51 First Habib Stock Fund -6.17 0.21 NAFA Stock Fund -5.62 1.79 AKD Opportunity Fund -6.03 -0.88 Source: TFD Research & Fund Manager Report
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PERFORMANCE
Balanced Funds
B
alanced funds were more flexible for switching of assets in terms of allocation. However, still, they have to maintain minimum exposure in equity market as per offering document. Benchmark KSE-100 Index went down by 6.71% after floods wreaked devastation as a result all the funds in the category yielded negative returns. The average return of balanced fund category during the month was 2.58%. Once again selection criterion was resilience, that is to say the funds with least negative returns compared to peers made it into this selection. KASB Balanced Fund with a negative return of 0.20% outperformed the category average return by 238bps and became the best pick. In terms of year to date returns, Nafa Multi Asset Fund offered a return of 4.03% followed by HBL Multi Asset Fund & Pakistan Capital Market Fund brought about a return of 2.15% & 1.56% respectively. In terms of asset size growth the category stood at Rs4.98 billion at the end of August, a 2.82% decline MoM as compared to Rs5.12 billion in July. In terms of asset size growth, KASB Balanced Fund surged by 0.92% MoM to stand at Rs438 million.
Balanced Funds
August Return (%)YTD Returns (%)
KASB Balanced Fund
-0.20
0.84
NAFA Multi Asset Fund
-1.98
4.03
Unit Trust of Pakistan
-3.10
0.99
HBL Multi Asset Fund
-3.20
2.15
Pakistan Capital Market Fund
-3.23
1.56
Faysal Balanced Growth Fund -3.76 1.35 Source: TFD Research & Fund Manager Report
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PERFORMANCE
Income & Money Market Funds
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ncome & money market funds once again showed volatile returns MoM, however this time the returns were on the right trail. Hence investors were happy to see some TFCs reversals on the upward side. Furthermore, Maple Leaf Sukuks came in a performing position as the company was able to pay its 2nd installment as well. (Impact will realise in September return). The income & money market funds which constitute 63% of total open mutual fund asset size showed a flat growth of 1.73% to touch Rs110.96 billion at the end of August as compared to Rs109.07 billion in July, which translates into a slight growth of Rs1.78 billion in absolute terms. Performance wise, JS Income Fund posted an annualised return of 18.44% in August and thus outperformed in its respective category, followed by Dawood Money Market Fund & Crosby Phoenix Fund, which delivered returns of 17.28% & 15.0% respectively. In terms of year to date return, Dawood Money Market Fund provided annualised return of 73.89% followed by JS Income Fund & HBL Income Fund rendered 13.74% & 11.40% respectively. In terms of equity asset size growth, BMA Express Cash Fund grew by 28.7% to Rs1,358 million followed by Lakson Income Fund & MCB Dynamic Cash Fund which swelled by 23.3% and 9.9% to Rs529 & Rs6,113 million respectively.
Income & Money Market Funds
August Return (%) JS Income Fund 18.44 Dawood Money Market Fund 17.28 Crosby Phoenix Fund 15.00 Atlas Income Fund 13.82 HBL Income Fund 13.78 IGI Income Fund 12.34 ABL Cash Fund 11.43 JS Cash Fund 10.88 Pakistan Income Fund 10.96 Faysal Savings Growth Fund 10.87 HBL Money Market Fund 10.84 Pakistan Cash Management Fund 10.61 MCB Dynamic Cash Fund 10.60 Lakson Money Market Fund 10.59 NAFA government securities liquid fund 10.54 ABL Income Fund 10.52 MCB Cash Management Optimizer Fund 10.50 UBL Liquidity Plus Fund 10.43 Atlas Money Market Fund 10.41 Alfalah GHP Cash Fund 10.39 JS Aggressive Income Fund 10.63 KASB Cash Fund 10.31 Meezan Cash Fund 10.29 Askari Sovereign Cash Fund 10.07 IGI Money Markets Fund 10.07 Lakson Income Fund 9.94 PICIC Income Fund 9.89 Meezan Sovereign Fund 9.82 BMA Express Cash Fund 9.74 NIT Government Bond Fund 9.57 Pakistan Income Enhancement Fund 9.52 NAFA Saving Plus Fund 9.37 ABL Islamic Cash Fund 9.04 First Habib Income Fund 8.75 Namco Income Fund 6.99 Alfalah GHP Income Multiplier Fund 6.98 United Growth & Income Fund 6.23 NIT Income Fund 5.14 MSF - Perpetual 2.86 AKD Income Fund 1.67 NAFA Cash Fund 1.12 KASB Liquid Fund 0.57 BMA Chundrigar Road Saving Fund -3.98 Askari Income Fund -18.20 IGI Aggressive Income Fund -50.04
YTD Stability (%) Rating 13.74 AA-(f) 73.89 N/R 1.95 A(f) 3.35 A+(f) 11.40 A(f) 11.32 N/R 11.43 AA+(f) 10.94 N/R 10.71 AA-(f) 10.73 A(f) 10.40 AA+(f) 10.74 AAA 10.80 A+(f) 10.72 AA 10.57 AAA(f) 10.50 A+(f) 10.90 AA(f) 10.84 AA+(f) 10.65 AA(f) 10.40 AA(f) 10.95 N/R 10.72 AA+(f) 10.17 AA(f) 10.46 AA+(f) 10.70 N/R 9.93 AA10.22 A+(f) 10.24 AA+(f) 10.10 AA+(f) 9.99 N/R 10.13 A+(f) 9.45 AA-(f) 9.04 AA(f) 9.36 AA-(f) -13.29 A-(f) 3.50 U/P -1.39 A(f) 7.72 N/R 5.16 AA (f) 7.75 BBB(f) 4.55 A+(f) -11.46BBB+(f) -8.03 BB+(f) -11.10 N/R -50.04 N/R
N/R: not rated U/P: under progress Source: TFD Research & Fund Manager Report
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PERFORMANCE
Islamic Equity Funds
A
s far as Islamic funds are concerned, all the three Islamic equity funds exposed to local capital market, laid bare negative returns during the month. Atlas Islamic Stock Fund showed strong resistance and posted less negative returns compared with its competitors. Atlas Islamic Stock Fund came up with a negative return of 3.84% followed by JS Islamic Fund and Meezan Islamic Fund with negative returns of 4.86% and 5.0% respectively. In terms of year to date returns, once again Atlas Islamic Stock Fund outperformed in its category by sporting a return of 5.78% followed by Meezan Islamic Fund & JS Islamic Fund with 4.0% and 2.43% respectively. The size of Islamic equity funds reduced by 6.6% to stand at Rs4.63 billion in August as compared to Rs4.96 billion in July. In terms of individual fund asset growth, once again Atlas Islamic Fund lost by only 3.4% to Rs254 million in August.
Islamic Equity Funds
August 2010 YTD Returns (%) Returns (%) Meezan Islamic Fund -5.0 4.0 Atlas Islamic Stock Fund -3.84 5.78 JS-Islamic Fund -4.86 2.43 Source: TFD Research & Fund Manager Report
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PERFORMANCE
Islamic Income Funds
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uring August, the downtrend knocked down the asset size of Islamic income funds by 3.0% to Rs5.92 billion as compared to Rs6.11 billion in July, despite the launch of Nafa Riba Free Saving Fund which raised Rs107.0 million in the month. Performance wise, Nafa Islamic Income Fund put up an annualised return of 24.96%, followed by Faysal Islamic Savings Growth Fund & IGI Islamic Income Fund posting returns of 10.52% and 10.47% respectively. The average annualised return during the month stood at 7.51%. In terms of year to date return, Nafa Islamic Income Fund & Meezan Islamic Income Fund turned over annualised returns of 13.88% & 11.31% respectively. As far as asset size growth is concerned, Askari Islamic Income Fund grew by 3.9% to reach Rs240 million.
August 2010 Returns (%) NAFA Islamic Income Fund 24.96 Nafa Riba Free Savings Fund 12.48 Faysal Islamic Savings Growth Fund 10.52 IGI Islamic Income Fund 10.47 Atlas Islamic Income Fund 8.39 Meezan Islamic Income Fund 7.97 Askari Islamic Income Fund 7.76 Pak Oman Advantage Islamic Income Fund 7.22 United Islamic Income Fund -3.76 KASB Islamic Income Fund -10.92 Source: TFD Research & Fund Manager Report
YTD Returns (%) 13.88 12.48 9.98 9.89 8.78 11.31 8.08 7.69 -4.24 -2.65
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PERFORMANCE
Asset Allocation Funds
T
hese funds enjoyed room for switching assets in terms of allocation. During August funds in this category reduced exposure in equity market anticipating a possible decline in KSE-100 Index. All the funds in the category, except for Nafa Asset Allocation Fund posted negative returns. Nafa Asset Allocation Fund was launched on August 21, 2010 thus it had an advantage of remaining invested in fixed income instrument until capital market provided any direction. In terms of year to date return, Askari Asset Allocation Fund footed a return of 2.76% followed by MCB Dynamic Allocation Fund & JS Aggressive Asset Allocation Fund with 2.50% and 2.18% returns respectively. In terms of asset size growth, the category stood at Rs1.50 billion at the end of August as compared to Rs1.48 billion in July, an increase of 1.5% MoM. Individual fund asset growth wise, almost all the existing funds growth was in red. However, inclusion of Nafa Asset Allocation Fund added to the size of the assets by 1.5% MoM.
August 2010 YTD Returns (%) Returns (%) Nafa Asset Allocation Fund 0.27 0.27 MCB Dynamic Allocation Fund -2.90 2.50 Askari Asset Allocation Fund -3.54 2.76 Alfalah GHP Value Fund -4.22 0.88 Faysal Asset Allocation Fund -5.07 0.24 JS Aggressive Asset Allocation Fund -5.10 2.18 Source: TFD Research & Fund Manager Report
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PERFORMANCE
Islamic Asset Allocation Funds
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he assets of Islamic asset allocation funds carried negative growth of 4.6% in August. All the funds in this category posted negative returns. The average return of the category turned out to be negative 2.80%. So, selection of the funds was based on the capability of providing least negative returns during the month. Dawood Islamic Fund posted a negative return of 1.16% and hence became the best fund in the category in August 2010. The category asset size stood at Rs2.06 billion as compared to Rs2.16 billion in July, a drop by 4.6% MoM. For year to date return, Nafa Islamic Multi Asset Fund was the best fund in the category posting a return of 4.13%, followed by Dawood Islamic Fund & Pak Oman Advantage Islamic Fund nailing returns of 7.80% & 3.50% respectively.
August 2010 YTD Returns (%) Returns (%) Dawood Islamic Fund -1.16 7.80 Askari Islamic Asset Allocation Fund -1.54 0.56 NAFA Islamic Multi Asset Fund -2.04 4.13 Alfalah GHP Islamic Fund -3.28 2.12 United Composite Islamic Fund -3.68 1.85 Pak Oman Advantage Islamic Fund -3.74 3.50 Pak International Element Islamic Fund-4.18 2.47 Source: TFD Research & Fund Manager Report
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WORLD STOCKS
Regional indices in August 2010
Panics & Profits Investors’ Guide Research lobal economic conditions significantly improved despite uncertainties galore. US economy showed some recovery, however, China did face some slowdown. The turnaround in the eurozone economies was due to rising exports and better than expected performance of banks, which released pressure building down on global financial markets. Despite strong recovery in global economy uncertainties still persist in the US financial system, as monthly economic indicators gave impression about a deceleration in US economy. The US benchmark index Dow Jones dropped 4.31% in August 2010, which is indicative of this notion. Indonesia benchmark Jakarta Composite Index went up 0.41% MoM as Indonesia's foreign exchange reserves reached $81.3 billion in August, representing an increase of $15 billion year to date, thanks to rising foreign direct investment as well as portfolio inflows attracted by an outperforming stock market and strengthening currency. Moving forward, Kuala Lumpur Composite index performed better than expected as it posted a gain of 4.52% during the month of August 2010 despite of Malaysia's industrial production which rose slower-than-estimated 3.2% YoY in July. This is consistent with a slowdown in exports, especially with Japan, the US, and China. Philippines exports also grew higher than expectation thanks to robust electronics sales which resulted in 36% growth in July exports compared to last year. The Philippines country index which was at all-time high during the month reflected reduced country risk and improved macroeconomic indicators. During August 2010, the Indian benchmark Sensex-30 index continued to falter indicating a consolidation, but nonetheless ended the month on a positive note with 0.58% growth. The Indian equity market remained nervous on
G
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account of global economic worries and possibility of a rate hike by the Reserve Bank of India (RBI) by another 50 basis points in its September 16, 2010 monetary policy announcement. On the other hand China posted flat returns i.e. +0.05% despite its imports recording better than expected results growing by 35% YoY which is higher than 23% YoY growth in July 2010. On the flip side, Nikkei fell 7.48% to break 9,000 point psychological barrier and closed at 8,824 points. The investors' fear regarding yen appreciation against US dollar , Europe's debt crisis, and concerns about slowing economic growth in China and the US dented global recovery. The pressure mounted on almost all the export-based economies' indices as Hang Seng, Kospi, and Taiex respectively went down by 2.35%, 0.94%, and 1.86% in August 2010. Country Indexes August Returns (%) Sri Lanka Colombo 9.62 Malaysia Kuala Lumpur 4.52 India Sensex 30 0.58 Indonesia Jakarta 0.41 China Shanghai 0.05 UK FTSE 100 -0.62 South Korea Kospi -0.94 Taiwan Taiex -1.86 Hong Kong Hang Seng -2.35 USA Dow Jones -4.31 Pakistan KSE100 -6.71 Japan Nikkei 225 -7.48 Source: Reuters
INVESTORS’ GUIDE
NEW IPO
NAFA Asset Allocation Fund Key facts FUND MANAGER FUND TYPE FUND LAUNCH\ DATE MINIMUM INVESTMENT FRONT END LOAD (%) MANAGEMENT FEES (%) FUND SIZE (MN) BENCHMARK TRUSTEE AUDITOR
NATIONAL FULLERTON ASSET MANAGEMENT LIMITED ASSET ALLOCATION FUND AUGUST 21, 2010 Rs10,000 2.0 2.0 Rs103 1/3 OF AVERAGE 3-MONTH BANK DEPOSIT RATE; 1/3 of 6-MONTHS KIBOR; 1/3 of KSE 30 INDEX CDC A.F FERGUSON & CO
Investment Objectives To generate income by investing in Debt & Money Market securities and to generate capital appreciation by investing in equity and equity related securities.
Funds Return August Return (%) Benchmark Return (%)
0.27 0.14
NAFA Riba Free Savings Fund Key facts FUND MANAGER FUND TYPE FUND LAUNCH\ DATE MINIMUM INVESTMENT FRONT END LOAD (%) MANAGEMENT FEES (%) FUND SIZE (MN) BENCHMARK TRUSTEE AUDITOR
NATIONAL FULLERTON ASSET MANAGEMENT LIMITED ISLAMIC INCOME FUND AUGUST 21, 2010 RS 10,000 0.0 1.5 Rs107 AVERAGE 3M DEPOSIT RATES of ISLAMIC BANKS CDC A.F FERGUSON & CO
Investment Objectives To provide preservation of capital and earn a reasonable rate of return along with a high degree of liquidity by investing in shortterm Shariah compliant banks and money market / debt securities.
Funds Return August Return (%)
12.48
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INVESTORS’ GUIDE
NEW IPO
ABL Cash Fund Key facts FUND MANAGER NATIONAL FULLERTON ASSET MANAGEMENT LIMITED FUND MANAGER ABL ASSET MANAGEMENT LIMITED FUND TYPE MONEY MARKET FUND FUND LAUNCH\ DATE JULY 30, 2010 MINIMUM INVESTMENT Rs5,000 FRONT END LOAD (%) 0.0 MANAGEMENT FEES (%) 1.25 FUND SIZE (MN) Rs2,451 BENCHMARK AVERAGE 3M DEPOSIT RATE of AA & ABOVE RATED BANKS TRUSTEE CDC AUDITOR A.F FERGUSON & CO
Investment Objectives The objective of ABL-CF is to provide investors, consistent returns with a high level of liquidity, through a blend of money market and sovereign debt instruments.
Funds Return August Return (%) Benchmark Return (%)
11.43% 7.28%
ABL Islamic Cash Fund Key facts FUND MANAGER FUND TYPE FUND LAUNCH\ DATE MINIMUM INVESTMENT FRONT END LOAD (%) MANAGEMENT FEES (%) FUND SIZE (MN) BENCHMARK TRUSTEE AUDITOR
ABL ASSET MANAGEMENT LIMITED ISLAMIC CASH FUND JULY 30, 2010 Rs 5,000 0.0 1.0 Rs347 AVERAGE 3M DEPOSIT RATE of 3 ISLAMIC BANKS CDC A.F FERGUSON & CO
Investment Objectives The objective of ABL-ICF is to seek maximum possible preservation of capital and offer steady rate of return by investing in liquid Shariah compliant instruments
Funds Return August Return (%) Benchmark Return (%)
INVESTORS’ GUIDE
9.04% 6.90%
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INVESTORS’ GUIDE
FUNDS IN FOCUS
PAKISTAN INTERNATIONAL ELEMENT ISLAMIC FUND Key facts FUND MANAGER FUND TYPE FUND LAUNCH\ DATE MINIMUM INVESTMENT FRONT END LOAD (% MANAGEMENT FEES (%) FUND SIZE (MN) BENCHMARK TRUSTEE AUDITOR
ARIF HABIB INVESTMENT MANAGEMENT ISLAMIC ASSET ALLOCATION FUND MAY 2, 2006 Rs 5,000 2.0 3.0 Rs 400 (70% KMI-30 INDEX +30% DJIM-WORLD INDEX) CDC KPMG
Investment Objectives The objective of the Fund is to provide medium to long term capital appreciation through investing in Shariah compliant investments in Pakistan and Internationally.
Return on Fund August10 Return (%) Quarter on Quarter (%) FY11 to Date Since Inception of KMI-30 Index
PIIFBenchmark -4.18 -4.45 2.52 4.32 2.47 3.94 11.18 22.80
PIEF (%) Benchmark (%)% excess Return Jan-10 -0.41 1.24 -1.65 Feb-10 -1.68 1.37 -3.05 Mar-10 2.82 6.21 -3.4 Apr-10 0.31 1.65 -1.34 May-10 -8.06 -8.92 0.86 Jun-10 0.04 0.35 -0.31 Jul-10 6.95 8.79 -1.84 August-10 -4.18 -4.45 0.27 Source: Fund Manager Report
Fund Size (Rs in Mn)% Growth MoM Jan-10 510.0 -8.93 Feb-10 490.0 -3.92 Mar-10 460.0 -6.12 Apr-10 450.0 -2.17 May-10 410.0 -8.89 Jun-10 410.0 0.00 Jul-10 430.0 4.88 Aug-10 400.0 -6.98 Source: Fund Manager Report
Fund Manger’s Point of View PIIF's NAV declined 4.18% during August as compared to a fall of 4.5% in its benchmark (70:30 weighted average return of KMI-30 and DJIM). Currently the exposure in the fund is restricted to domestic market only. During the month, the fund slashed its equity holdings to 68.86% from 84.20% at the beginning due to likely fallout on equities on account of severe negative impact of massive floods in the country. PTCL has been offloaded completely, while exposure in oil & gas, banks, auto and chemical sectors has been reduced. Among major portfolio holdings, Packages, POL, Pak Suzuki, Agri autos, PAEL and PTCL fell more than the market. On the other hand, PPL, HUBCO, ICI, SEARL, FFBL, FFC, AGTL and MEBL outperformed the market.
Top Ten Holdings Packages Pakistan Petroleum Limited Pakistan Oil Fields Limited ICI Pakistan Hub Power Company Limited Searle Pakistan Agriauto Industries Pak Electron Fauji Fertiliser Company Fauji Fertiliser Bin Qasim Source: Fund Manager Report
% of Total Assets 11.6% 10.7% 10.4% 7.9% 6.9% 4.1% 3.2% 2.9% 2.4% 2.1%
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FUNDS IN FOCUS
NIT-GOVERNMENT BOND FUND Key facts FUND MANAGER NATIONAL INVESTMENT TRUST LIMITED FUND TYPE INCOME FUND FUND LAUNCH\ DATE NOVEMBER 18, 2009 PERFORMANCE BENCHMARK 70% AVERAGE OF WEIGHTED AVERAGE YIELD OF 6 MONTH T-BILL AUCTIONS HELD DURING THE PERIOD & 30% 1-MONTH AVERAGE DEPOSIT RATE Of A RATING AND ABOVE SCHEDULE BANKS INITIAL PUBLIC OFFER Rs100 FRONT END LOAD 1.0% MANAGEMENT FEES 1.25% FUND SIZE (MN) Rs2,800 NAV Rs10.1611 AMC RATING AM2 (PACRA) TRUSTEE CDC AUDITOR AF FERGUSON
Investment Objectives
Performance Review
The objective of NIT Government Bond Fund is to generate best possible return with minimum risk, for its Unit Holders, by investing primarily in the Government Securities.
NIT Government Bond Fund (NIT GBF) yielded an annualised return of 9.57% in July 2010 compared with the benchmark return of 10.80%, whereas, the Fund's annualised return since its inception (18th November 2009) was 10.60% against the benchmark return of 10.47%, an out-performance of 13bps. The August return was lower due to the increase in the discount rate however fund manager expects returns will normalise during the coming month. In anticipation of rising interest rates, exposure in short term T-Bills was also increased during the month. The weighted average maturity of the T-Bill portfolio has decreased to 128 days from 175 over the last month. NIT GBF has around 96% of its total assets invested in Government Securities, while the remaining portion of the fund is in the form of cash with banks and others. NIT GBF will push its strategy of investing in shorter tenure securities in the coming months due to uncertainty in the market to best safeguard the interest of its unit holders.
Return on Fund August Return Year to Date Return Since Inception
NIT-GBF 9.57 9.99 10.60
Monthly NIT-GBF Benchmark Annualised % % Returns Jan-10 11.31 10.32 Feb-10 9.07 10.38 Mar-10 13.44 10.47 Apr-10 11.11 10.43 May-10 9.80 10.34 June-10 8.21 10.45 July-10 10.45 10.53 August-10 9.57 10.80 Source: Fund Manager Report
Benchmark 10.80 10.65 10.47 % Excess Return 0.99 -1.31 2.97 0.68 -0.54 -2.24 -0.08 -1.23
Asset Size Fund Size (Rs in Mn)% Growth MoM Jan-10 3,800.0 52.00 Feb-10 4,200.0 10.53 Mar-10 3,950.0 -5.95 Apr-10 4,084.0 3.39 May-10 3,921.0 -3.99 June-10 3,741.0 -4.59 July-10 3,733.0 -0.21 August-10 2,800.0 -24.99
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Asset Allocation
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REVIEW
SBP raises key rates by 50bps Brokers’s Stance
MPS for Oct-Nov announced Investor’s Guide Research
D
Chairman AKD Group, Aqeel Karim Dhedhi strongly criticised the step of the central bank and said these people don't have any long-term plan and the members of SBP board have conflict of interest as they have savings in their accounts on which they want to earn interest that is why they are making such decisions also they are incompetent people to look after the affairs of state bank.
espite anticipations of status quo in interest rates -- if not lowering it down -- State Bank of Pakistan in a surprisal move has once again amplified the benchmark rates by 50 basis points, with the new rates now stand at 13.50. According to the SBP Monetary Policy Statement for the next two months (Oct-Nov) announced here Wednesday, the move aimed to contain fiscal deficit and combat rising inflation. This decision was taken at a meeting of the Central Board of Directors of the State Bank of Pakistan held under the Chairmanship of new SBP Governor, Shahid H Kardar. "A tightening of the stance is thus called for in full recognition that the difficulty to contain the fiscal deficit has resulted in the private sector bearing the full brunt," the SBP said in a statement. The statement further said that the next quarter will be crucial in forming an assessment of the effectiveness of government efforts to contain the fiscal deficit and its inflationary borrowings from the SBP and the banking system. According to some analysts, the interest rate should have been lowered considering the current economic conditions. They are of the view that with such a high interest rates it would become next to impossible for investor to invest into the country. Pakistan's economy was fragile even before devastation floods ripped through the country in August. The State Bank of
Pakistan raised the rate by 50 basis points to 13 per cent on July 30, also to control inflation and the fiscal deficit. "Post-flood projections raise legitimate concerns about the worsening of the macroeconomic balances," the central bank said, adding that the government was not doing enough to reduce the deficit. A widening fiscal deficit increases aggregate demand and fuels inflation. The government has borrowed 220 billion Pakistani rupees ($2.55 billion) from the central bank from July 1 to Sept 24, missing the target of zero net borrowing from the State Bank of Pakistan. The central bank said GDP growth could fall to 2.5 per cent in fiscal year 2010/11, compared with the original target of 4.5 per cent. Inflation for the fiscal year ending June 30 could be between 13.5 per cent and 14.5 per cent, compared with the original target of 9.5 per cent. The central bank in July had raised its benchmark rate for the first time since November 2008, citing "risks to the inflation outlook" after the government increased power tariffs. Analysts had earlier made a long term prediction that there would be a 50 to 100 basis point increase in the rate. This hike also follows after a recent forecast by the Asian Development Bank (ADB) which predicted a tepid economic growth of 2.5 per cent in fiscal year 2010-11 compared to the target of 4.5 per cent because of the massive flooding and its impact on all sectors.
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TO INCREASE FINANCIAL INCLUSION
FLOOD LOSSES CREATED OPPORTUNITY FOR BANKS SBP head sees chances for banks Investors' Guide Report
S
hahid H Kardar, Governor State Bank of Pakistan has said that the recent floods provide an opportunity for the banking industry to increase financial inclusion, diversify its products on sustainable basis and play its due role in rebuilding the national economy. Speaking at a Roundtable Discussion on 'Damage Assessment of Floods and Implications for the Financial Sector' arranged by the State Bank in Karachi on Thursday, Kardar said that the central bank is cognisant of the adversity and has taken initiatives to assess the damage and encourage the use of best practices in the interest of long-term development of the financial sector. Kardar said that the present scenario does not bode well for the agenda on financial inclusion as a significant proportion of the floodhit population could be pushed below the poverty line. Moreover, those already excluded will have little access to formal financial services such as savings or insurance mechanisms to re-build their asset base, he added. The SBP Governor urged the financial institutions to come forward and play their due role in rebuilding of the affected areas as the State Bank and the Government would not be able to do it alone. "The agriculture, microfinance and SME sectors need special support of the banking industry in order to re-start the process of income generation," he stressed. He informed the participants that
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these committees have recommended write-offs of existing loans where prospects of recovery are slim, restructuring/rescheduling of lending; refinance facilities for fresh lending and subsidy on associated financial charges. He said that the State Bank generally discourages such interventions as they create market and price distortions, promote misallocation of scarce credit resources and have monetary implications. However, keeping in view the special circumstances, decision makers may wish to consider a combination of such activities for a limited period, say two years, for flood affected areas, with the cost to be borne by the Federal Government. The State Bank in consultation with the Federal Government and donors is deliberating measures In his presentation, Mansoor Ali, Director Economic Analysis Department of the SBP, talked about post-flood macroeconomic outlook.
He began by cautioning that the assessment to be presented was still highly provisional, but based on the information available it seemed likely that GDP growth was expected to range between 2.0 percent to 3.0 percent in the current 2010-2011 fiscal year (FY11) while inflation is estimated to be 13.5 percent to 14.5 percent. Mansoor said that agriculture sector growth would be significantly weaker than earlier projections, but that the negative impact on the growth of industry and the services sectors would be lower. Muhammad Ashraf Khan, Executive Director, Development Finance Group of SBP, said that according to initial estimates recent floods have caused additional loan losses of Rs 42.3 billion for banks out of which Rs 28.3 billion is from the agri. sector. Estimated loan losses for the microfinance institutions are estimated to be Rs 3.09 billion, he added.
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Make the rich pay taxes US hints at tougher terms on aid Tanzeel-Ur-Rehman
T
he United States will set tougher conditions on its aid to foreign governments, including an expectation that rich foreigners won't skip out on their taxes while Americans bankroll things their nations need, Secretary of State Hillary Rodham Clinton said. The remarks were aimed largely at Pakistan, a major aid recipient. "Countries that will not tax their elite who expect us to come in and help them serve their people are just not
Barack Obama announced last week. Treasury Secretary Timothy Geithner said the higher bar for US aid will help the US get more for its money. "Unless we are tougher on how we provide assistance, unless we look at those basic simple things, like are they running their country in ways that give us confidence that our resources will be used well, we should not be financing them at this level," Geithner said.
"Countries that will not tax their elite who expect us to come in and help them serve their people are just not going to get the kind of help from us that historically they may have," going to get the kind of help from us that historically they may have," Clinton said. She singled out Pakistan, where wealthy landowners typically pay little or no taxes. Clinton's warning came as she and other Cabinet officials described aid and development policies President
Clinton delivered a milder warning about taxes during a visit to Pakistan last summer, which drew an angry response from Pakistan. Speaking on Tuesday at the nonprofit US Global Leadership Coalition, Clinton said that Pakistan is now drafting new tax policies.
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Lawmakers urge govt
Let Ogra fix LPG prices Tanzeel-Ur-Rehman
N
ational Assembly members have urged the government that Oil & Gas Regulatory Authority (OGRA) should be given the authority to control price of Liquefied Petroleum Gas like it does of Petrol, Gas and CNG. They said that 86 LPG companies are doing whatever they wish and strict action should be taken against them. Responding to a call attention notice of Bargees Tahir, Baligh-ur Rehman and Khalida Mansoor PM Advisor
floods hitting most part of the country, also affecting the gas installations. He said the situation is returning to normally and a decrease of Rs3 has been witnessed in LPG prices, hoping that prices would be returned to the older rates. Gul said as the LPG is a deregulated product so it does not fall under the purview of Oil and Gas Regulatory Authority; however a pricing mechanism exists there to ensure sale of commodi-
Gul said as the LPG is a deregulated product so it does not fall under the purview of Oil and Gas Regulatory Authority; however a pricing mechanism exists there to ensure sale of commodity at rate determined by the government. Ghazanfar Gull said that there is a vast difference between LPG supply and demand. Replying to a calling attention notice, Advisor to Prime Minister Nawabzada Ghazanfar Gul told the House that LPG prices had witnessed a surge of Rs 7 owing to the
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ty at rate determined by the government. He 86 companies have been issued license and are operating across the country adding the government is authorized to impose fine and suspend license if found overcharging from the consumers.
DEVELOPING STORY
INVESTORS’ GUIDE
MTS at KSE doorstep, knocking SECP
GIVES GREEN SIGNAL TO
MTS
CONCEPT PAPER
Nawaz Ali
M
argin Trading System soon to get its way into the Karachi Stock Exchange as Securities and Exchange Commission of Pakistan (SECP) approved the concept of Margin Trading System (MTS) with additional risk mitigating measures. The concept of MTS was earlier proposed by the Karachi Stock Exchange (KSE). It was reviewed by an Independent Committee of Professionals constituted by the SECP. The Committee submitted its report in July 2010. The Report of the Committee was approved by the Board of Directors of the three stock exchanges and the National Clearing Company in their subsequent meetings. The recommendations of the Committee in relation to the MTS were reviewed in detail by the SECP in the Commission meeting. The SECP approved MTS with certain amendments to further strengthen risk management and provide for measures to curtail systemic risk, in the interest of the market. The above approval of the Commission will be followed by carrying out necessary amendments to the draft Securities (Margin Financing, Securities Lending and Borrowing and Pledging) Rules, 2010. Thereafter, the same will be forwarded to the Government for promulgation. Sources told TFD that the concept paper is likely to get approval by the law ministry within a month and it is expected that MTS would
be available at the stock exchange in October. Furthermore, A meeting of the Securities and Exchange Commission of Pakistan (SECP), member directors of the Karachi Stock Exchange Board and some prominent market participants was held on Monday to discuss various market developmental initiatives. Deliberations were held on some aspects of the Margin Trading Product recently approved by the SECP and it was agreed that during the course of developing the regulatory framework due consideration will be given to the operational and business aspects to avoid any inconsistency/impracticality. Also, governance-related matters of the stock exchange came under discussion and it was agreed that the SECP would review the matter jointly with the Exchange's representatives to address issues in light of best international practices and
in the interest of the market. The meeting discussed various proposals that were underway for the development of the capital markets and boosting of investors' confidence. These include the revamping of broker regime in areas of capital adequacy, code of conduct, credit rating, consolidation of brokers through requirements of adequate capital base and a robust compliance and inspection regime. The participants supported demutualization of the stock exchange while making the market more vibrant to attract investors that lead to better valuation of the Exchange. The SECP emphasized upon the introduction of various measures to strengthen investors' protection and revive investors' confidence, which include an improved know-your-client regime and the implementation of automation of securities project at the CDC.
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REVIEW
INVESTORS’ GUIDE
Four Fresh Funds fail to further MFs size M UTUAL F UNDS
ASSETS DOWN
1.4 PC M O M
IN
A UGUST
M
utual Funds industry size declined by 1.4 per cent MoM to Rs207.3 billion in second month of fiscal year 20102011 as compared to Rs210.2 billion in July 2010, despite of four new funds were launched in the month but disappointedly they didn't able to increase fund size as mutual fund industry asset under management fell below Rs208 billion. The decline in asset size growth was due to fall in asset class value i.e. KSE 100-Index declined by 6.71 per cent during August as investors woes regarding post-flood condition and expectation of uptick yield curve in discount rate. The delay in leverage product further hit investor's sentiment during the month. Open-end funds which contribute almost 85.0 per cent of total Mutual Fund industry size stands at Rs176.76 billion at the end of August 2010 compared to Rs177.8 billion a month earlier, posted slightly negative growth of 0.6 per cent MoM while closed-end fund industry size stands at Rs30.51 billion (dropped by Rs1.77 billion in absolute term). Moving towards categories, Income & Money Market Funds category has posted asset size growth of
during the month. The category stands at Rs111 billion till August 2010 compared to Rs109 in July 2010.
July 2010. The other categories having exposure in equity market has also posted decline i.e. Islamic Equity, Islamic
Income & Money Market Funds category has posted asset size growth of 1.7 per cent MoM; thanks to ABL Asset Management which has launched two new funds which cumulatively added Rs2.8 billion during the month. 1.7 per cent MoM; thanks to ABL Asset Management which has launched two new funds which cumulatively added Rs2.8 billion
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Equity funds category showed major decline of 5.9 per cent to stand at Rs38.79 billion till August 2010 compared to Rs41.24 billion during
Asset Allocation and Balanced fund categories all of them declined by 5.8 per cent, 4.6 per cent & 0.7 per cent MoM.
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INVESTORS’ GUIDE
ADB SEES AGRICULTURE SNAP-BACK IN 2-YEAR Billions of dollars in flood damage, slow recovery seen Shiraz Ahmed
P
akistan's agriculture industry -- a pillar of the economy -could take two years to start recovering from devastating summer floods, the Asian Development Bank (ADB) said in its report. The ADB and the World Bank are assessing the damage caused by one of Pakistan's worst natural disasters, which destroyed 1.3 million hectares of crops just before the harvest of key products such as rice, maize and sugarcane. "Once the country gets back on its feet, it will be able to meet part of those agricultural import needs that will happen over the next two years," Philip Erquiaga, director general of ADB's private sector operations, told Reuters. "We are thinking within that time horizon we should be able to see the agriculture sector coming back," he told Reuters. Agriculture is Pakistan's second largest sector, accounting for over 21 per cent of gross domestic product. Nearly 62 per cent of the population depends on agriculture for their livelihoods. The ADB said earlier it could provide Pakistan with around $1.5$2 billion of trade finance to help with recovery and reconstruction after the floods, some $500 million more than it earmarked originally. The ADB expects half of that increase to be used for basic commodities, including food and medicine, said Erquiaga. "The balance of that we will probably see coming in the form of capital goods imports related to
reconstruction," he said. In 2009, ADB's Trade Finance Programme exposure of $249 million to Pakistan banks supported $983 million in trade. The floods, triggered by heavy monsoon rains in late July, forced at least 10 million people from their homes. Washington wants economic and political stability in Pakistan, which it sees as a vital ally in its war on militancy. Last week, the US Special Representative for Afghanistan and Pakistan, Richard Holbrooke, said Pakistan's allies could only do so much to rebuild the country. The government, he said, had to raise
tens of billions of dollars itself. Pakistan has received $451 million from the International Monetary Fund (IMF) to help the country rebuild after the floods, the central bank said on Monday. The IMF has said the money will go toward Pakistan's budget and immediate foreign exchange needs. Pakistan’s tax-to-GDP ratio is about 10 per cent, one of the lowest in the world, and while the government has called for greater revenue collection, it has done little to broaden a very narrow tax base. The ADB said previously it would extend a $2 billion assistance package to Pakistan to help repair damage from the floods.
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ANALYSIS
INVESTORS’ GUIDE
Slump stays new shares offerings to public
KSE in IPO drought $27.43 MILLION INVESTED IN KSE DURING RAMADAN Nawaz Ali
P
akistan capital market is passing through worst situation and this can be judged from the fact that no company has offered shares to public since April, 2010. Bad experiences by shareholders in last few offerings, record low volumes and weak economic fundamentals caused issuers to delay their offerings. Investor’s bad experience in last few IPOs is the prime reason behind the delays especially when 4 out of 5 IPOs trading at 22-60 per cent discount to their offer price. Thus new companies are not able to raise funds through public offerings at the local exchanges. As a result Karachi exchange witnessed last 6months with no public offerings thereby affecting the development and depth of the local stock market. As per the analyst of Topline Securities, Pakistan stock market has witnessed 5 equity offerings with total size of Rs3.5 billion so far 2010. Though the response from previous 5 IPOs has been encouraging except for Agritech that was undersubscribed, the shareholders have not benefited as these stocks is now trading below their offer prices. Except for Amtex, 4 IPOs (Fatima, Safe Mix, Agritech and Wateen) are now trading below their offer price. Though the price discount is lower in Agritech (22 per cent), Wateen, the largest offering of this year, is trading at 60 per cent discount to its offer price of Rs10, he added. Thus with depressing and dull activity at local bourses where volumes are already at 9 year low and investors are uncertain over the economic growth after the recent floods, there are chances that the new offerings could be delayed further.
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Once the situation on the security and economy improves, new IPOs will come to the market but slowly and gradually. However, the government can play a key role in the IPO market by offering shares of public owned companies especially of those companies which are favorites of foreign fund managers. This will not only increase the free float but will also provide the muchneeded depth to the Pakistan stock market besides helping cash starved government to raise funds to financing its mounting fiscal deficit. Meanwhile, The buying momentum by the offshore investors in the local bourse witnessed but with lower pace during the Ramadan as only $27.43 million net-buying was recorded, as per the National Clearing Company of Pakistan Limited (NCCPL) data. Previously, equity market saw netbuying of $154.8 million in Ramadan 2009 where equities prices were at extremely attractive level induces foreign investors to take more expo-
sure. On the other hand, KSE 100Index almost remained flat (up 3.65 points) with extremely thin volumes during Ramadan. As per TFD analyst, investors remained concerned on devastations of flood, expected losses over $20 billion and low pledges for rehabilitations. He said that sudden jump in credit default swap spread by 210 bps, owing to higher risk of government borrowing required to fund flood victims and Moody's downgraded outlook for five major banks to negative from stable further dampened sentiments. During the Ramadan, foreign investors have traded $71.88 million worth of shares which represents 6.8 per cent of total trading value in KSE. Furthermore, offshore investors bought $92.84 million of shares whereas they offloaded $65.41 million worth of shares, resulting in the net-buying of $27.43 million. While the cumulative net inflow of portfolio investment during current financial year now reached at $93.36 million.
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INVESTORS’ GUIDE
IMF $450 MILLION
AID AT-THE-READY Despite promises of support, a document released by the IMF during the talks indicated that the fund was not satisfied with Pakistan’s pre-flood performance Tanzeel-Ur-Rehman
T
he IMF board approved a $450 million emergency assistance for flood recovery efforts in Pakistan. This will be a single-tranche assistance, which means that Pakistan will get the entire amount in one installment. It is expected that the disbursement may begin from next month. The IMF had pledged this emergency assistance in a meeting with Pakistani officials in Washington. The IMF is also scheduled to hold the fifth review of an existing $11.3 billion loan arrangement this month (October). The decision, taken after a series of meetings between Pakistani and IMF officials in Washington, removes the risk that the fund may delay or withhold future payments because of Pakistan’s inability to implement some of the conditions on time. The sources said that the IMF had agreed not to attach new performance criteria or benchmarks to the loan programme initially negotiated in 2008. Pakistan, however, is still required to meet the four existing conditions of tax and energy sector reforms, granting autonomy to the State Bank and fulfilling its promise to bring the fiscal deficit to four per cent during the current budgetary year. The fifth review will be held in October, which will then go to the IMF board in November and Pakistan is likely to get the next tranche of about $1.2 billion within the current fiscal year.
Earlier, IMF’s Deputy Director of External Relations Gerry Rice assured Islamabad that the fund wanted to “do as much as we can to help Pakistan at this time, by whatever means”. IMF’s Director for Middle East and Central Asia Department Masood Ahmed offered similar assurances while promising an emergency assistance of $450 million. Despite these promises of support, a document released by the IMF during the talks indicated that the fund was not satisfied with Pakistan’s preflood performance. While noting that the IMF-Pakistan loan programme “got off to a good start and Pakistan’s economy has made progress towards stabilisation”, the document notes that the Pakistani economy was once again on a slippery slope. It urges Pakistan to treat external support only “as a bridge to a greater domestic revenue effort”, which will be indispensable to sustain development spending, achieve poverty reduction, and increase much-needed
social outlays over the medium-term. In this regard, the IMF reminds Pakistan that “the introduction of a broad-based value-added tax is essential”. The document notes that while there has been some progress towards the reform in the electricity sector, “more needs to be done to eliminate the financial losses of electricity companies and other public enterprises”. According to the document, inflation has been on the rise again and reached 13 per cent in March 2010. Pakistan’s fiscal policy continues to be affected by low economic activity and a difficult security environment. The document notes that Pakistani authorities have been striving to maintain fiscal discipline by eliminating non-priority spending. “Such efforts proved initially successful, but since June 2009 the authorities have repeatedly exceeded the quarterly budget deficit targets under the IMF programme.”
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COMMENTS
INVESTORS’ GUIDE
TAX MORE, GET MORE WB President Robert Zoellick tells Pakistan to widen tax net, urges people to pay more taxes to mobilise world finances Shiraz Ahmed
W
orld Bank has urged the Government of Pakistan to widen the tax net in the country in order to fetch more revenue which would, in return, not only help it cope the rehabilitation but will also mobilise finances for Pakistan. Addressing the United Nations High Level Ministerial Meeting on the Flood Emergency in Pakistan WB president Robert B Zoellick said that he sympathizes with the Pakistani flood affectees. He said the first focus has understandably been on the humanitarian calls for help. The World Bank Group pitched in with rescue boats and the $300 million of fast-disbursing funds for critical needs. For the fiscal year, we will devote one billion dollars of concessional finance, our IDA money, for flood recovery and reconstruction. "I expect that IFC, our private sector arm, will commit $400-500 million this year as well for microfinance, and trade finance", the WB President said. He
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said We've worked with donors to MDTF for border areas to reallocate those contributions, although they are sorely needed in frontier areas too. Many have mentioned partnering with AsDB and One UN on damage and needs assessment as waters recede. There is a team of over 100 people, covering 66 sector specialists. "Maybe, just maybe, we can transf o r m tragedy t o
opport u n i t y. We will only succeed if government truly t a k e s
ownership, and is backed seriously by donors", he said. He said first, to make most effective use of help - and even to secure full donor support - the Government needs reconstruction founded on transparency, accountability and flexibility and we need to work through Pakistan institutions. He said the World Bank has practical experience in fiduciary responsibility, finance management, and procurement. We have experience in connecting local voice and community participation. Senior Pakistan officials have told us this is what they want to do. said that he urges the Government of Pakistan to take concrete steps, backed by law, by October meeting in Brussels, if not before. "The World Bank Group will help: This is an opportunity to build Pakistan ownership, and government capacity", he said. Second, we will be able to get donors to contribute more - and sustain their efforts. If GOP can help by showing it will mobilize all its strength. We've seen fantastic capabilities in Pakistan's rescue efforts. We need to continue and broaden civilian and political segment, the WB president said. "Pakistan's revenue has amounted to about 9 per cent of GDP. This is pretty low by international standards. We need Pakistanis to pay for Pakistan if we are to mobilize the world to pay for Pakistan. Again, we're pleased the Government has stated its commitment, and we would be pleased to assist with follow through working with the IMF.
SPECIAL REPORT
INVESTORS’ GUIDE
ADNAN KHAWAJA
FROM OGDC TO ADIALA JAIL COURT ALSO DISQUALIFIES KHAWA FOR HOLDING PUBLIC OFFICE Investors’ Guide Report
T
he high-drama between bureaucracy and bench has been going on, and in its latest episode Adnan Khawaja, former managing director of OGDCL was arrested from the courtroom and has been sent to Adiala Jail. However Khawaja was released on the following day after apex court accepted his bail against two surety bonds of Rs0.5 million each. Earlier , during the hearing of the case, SC maintained that NRO had been declared void on December 16, and the sentence terms of the accused persons stand restored in accumulation of illegal assets case and their acquittal stand annulled automatically in the light of apex court decision. The bails granted to them stand no more now, court added. A 3-member bench of SC comprising Justice Tariq Parvez and Justice Ghulam Rabbani and presided over by Chief Justice of Pakistan Iftikhar Muhammad Chaudhry took up the case on implementation of apex court decision on NRO for hearing. Adnan Khawaja had been awarded punishment of 2 years and fined Rs 200,000. The court had also disqualified him for holding any public office for 10 years. Secretary Establishment Division told establishment division had issued notification of Adnan Khawaja
as MD OGDCL as it was not in its knowledge that Adnan Khawaja was ineligible to hold any public office and he was convicted by NAB. Orders regarding his notification had come from above, he told. "Adnan A Khawaja continued to work as chairman Newtech despite nullification of NRO by the SC and later he was appointed as MD OGDCL after accountability court decision while the court had disqualified him for holding public office for 10 years and his conviction had not been quashed. Not arresting Adnan Khawaja is tantamount to non-implementing SC orders", CJP remarked.
Deputy Chairman NAB is also holding his office illegally after court decision, CJP said. Directing Attorney General (AG) Maulvi Anwar-ul Haq, the CJP said under the court's decision only 10 days were left more with you that permanent chairman be appointed. Furthermore, a high-level consultative meeting was held under the chair of Prime Minister Syed Yousuf Raza Gilani to review the situation arising out of arrest of ex-MD of OGDCL Adnan Khawaja from the courtroom on special directive of a three-member bench of Supreme Court. According to official sources, it was decided during the meeting that the government would ensure the implementation of the Supreme Court orders. It is relevant to note that in the wake of the suo moto notice taken by Chief Justice of Pakistan Iftikhar Chaudhry, government annulled the appointment of Adnan Khawaja as Managing Director Oil & Gas Development Company Limited (OGDCL), only a day after he assumed the charge. Sources said that the PM issued special directives to withdraw the appointment and ordered Federal Minister for Petroleum and Natural Resources Naveed Qamar to make appointment on the said post on merit.
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SPECIAL REPORT
INVESTORS’ GUIDE PROJECT TO COST $3BN
STAKEHOLDERS SEAL
TAPI GAS DEAL Tanzeel-ur-Rehman
T
urkmenistan, Afghanistan, Pakistan and India inked framework of an agreement to construct a gigantic pipeline pumping natural gas to South Asia, a Pakistani official said. The Turkmenistan-AfghanistanPakistan-India (TAPI) gas pipeline project, valued at more than $3 billion, has long been discussed by governments and energy companies but instability in Afghanistan has so far made its construction impossible. Turkmenistan, holder of the world's fourth-largest natural gas reserves, is keen to revive plans to build the TAPI pipeline through Afghanistan to the markets of Pakistan and India. The former Soviet state is looking to diversify energy sales from its traditional market, Russia, and is courting investors from the West, China and other Asian countries. "The petroleum ministers of the four countries have initialed the Gas Pipeline Framework Agreement in Ashgabad," a Pakistani Petroleum Ministry spokesman told Reuters. He said the final agreement would be signed in the next meeting of the four countries after the formal approval of their governments. Meanwhile, Afghanistan will secure a planned international gas pipeline through the Taliban heartland by burying sections underground and paying local communities to guard it, the mining minister said. Wahidullah Shahrani also said he was confident the project-- valued at $3.3 billion and which would run fromTurkmenistan, through Afghanistan and Pakistan to India (TAPI)-- could secure international
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funding. "This huge project is very important to Afghanistan,"Shahrani told a news conference in the capital, Kabul. "We will be earning a transit fee of hundreds of millions of dollars each year, it will create tremendous job opportunities for the people of Afghanistan during and after the construction, and the major population centres along the pipeline will benefit from the gas supplies," he said. Turkmen President Kurbanguly Berdymukhamedov has ordered that the project be completed and operational by 2014, one of Shahrani's aides told, so the four countries are working at top speed to complete preliminaries before seeking investors. Berdymukhamedov has also provided audited studies of the gas fields which would supply the pipeline, to reassure investors and the governments involved that there will be enough supply. Analysts, however, say the agreement is still at a preliminary stage and
that security challenges in Afghanistan and the tensions between India and Pakistan remain an obstacle. The project was originally mooted in the early 1990s, but has been stalled by years of conflict and instability in Afghanistan. Turkmenistan, holder of the world's fourth-largest natural gas reserves, is actively looking to diversify energy sales from its traditional market, Russia, and is courting investors from the West, China and other Asian countries. The four countries the pipeline passes through signed the framework of an agreement on Monday. They will have three or four meetings before the end of the year to bash out technical details, and the heads of government of all countries will meet in December to sign an inter-government agreement giving political impetus to the deal,Shahrani said. Energy-hungry Pakistan is pushing hard for a quick implementation of the long-delayed project.
SPECIAL REPORT
INVESTORS’ GUIDE
NEW TAXES TERMED
Fatal to Textiles Investors’ Guide Report
Z
ubair Motiwala, Chairman Council of All Pakistan Textile Associations (CAPTA) has asserted that Value Added Tax (VAT) regime will certainly break the backbone of our nation's economy - the textile sector. Addressing a press conference at PHMA House, Karachi, where chairmen of 16 textile associations participated, he stated that in the past, he had made a presentation to CBR on zero rating of sales tax and fortunately CBR agreed and it was proved that the government which was generating net revenue of Rs3 billion only from the entire textile sector, however after phasing out GST on exportoriented sector, tax frauds / leakages worth Rs32 billion were averted. Later on, Shaukat Tareen was also convinced about this advantage and continued zero rating of sales tax for entire five sectors. This resulted in the liquidity being maintained. Additionally exports increased and flourished. He stated that the intention of the present government to withdraw this zero rating of sales tax and implementation of VAT would be a step backward and ruin the backbone of the nation's economy - the textile sector. He wondered why when we know that poison is dangerous, are we again thinking of taking poison? He said that it was surprising that despite experiencing the great advantages of the zero rating facility, the government is again going backward. He said that presently the textile sector is undergoing the worst ever crisis with yarn prices doubled and cost of doing business rising, if we calculate at export of $10 billion, the cost of raw material being $5 billion, with this 15 per cent sales tax the government will generate $750 million which amount will remain be
held up with government as interest free liquidity / loan of the exporters. He said sales tax was paid by the exporters and then refunded which not only involve cumbersome procedure, extra expenses on sales tax staff but also huge liquidity of the textile industry was blocked causing them immense hardship. He said that discontinuing the zero rating on exports would open floodgates of corruption and encourage large number of fake firms to make flying invoices and make easy money which would be a huge loss once again to the government. Appreciating the efforts of the foreign minister at Brussels for getting the grant of duty free access from EU, he said that all this would go in vain with the discontinuing zero rating of exports. He wondered what will be the fate of our exports after phasing out of zero rating when with our entire capital and liquidity blocked, the banks also are not prepared to give loans to the textile sec-
tor. We strongly suspect that someone in the government is misguiding the government and intends to open floodgates of corruption by promoting discontinuation of zero rated which will result in many units to close down and creation of large number of sick units. He stated that in the present most difficult scenario when gas and electricity prices are skyrocketing and in the face of the flood disaster when more than 10 million people have become homeless and with losses of $43 billion initially as estimated by the government, it will be impossible to absorb the large number floodaffectees in jobs. He pointed out that recently FBR issued a general procedure for active taxpayers which include a harsh provision of declaring them non-active on the basis of discrepancies on e-filing if not responded within 15 days, despite the fact that generally it is a
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SPECIAL REPORT
INVESTORS’ GUIDE
part of the systemic problems. These sorts of draconian laws will further create mistrust among taxpayers community resulting in great mess and chaos. Zubair Motiwala stated that today we have to create jobs due to exodus of flood-affectees and we appeal to the government to prevail upon the US for duty free access. In
which apart from pending sales tax refunds' claims of approximately Rs12 billion, huge amount of drawback claims of the exporters have not been cleared since last couple of years with all their capital and liquidity blocked indefinitely with the government. He said that with the introduction of inland revenue already all refund affairs have come
ery and proves to be an exercise in futility. Due to shortage of collectors, auditors and staff, government instead of incurring huge amount of money on such overheads can use them for generating sales tax from retail sales. He warned that if the government discontinues zero rating, flight of capital to Egypt, Sri Lanka etc would increase and lead to great problems and chaos in our country. Yaseem Siddique, Acting Chairman, APTMA endorsed the views expressed by Zubair Motiwala and Jawed Bilwani and said that the government by discontinuing zero rating will definitely go once step back, he gave example of imposition of wealth tax which was implemented and then again withdrawn and wondered why the government first learns and agrees with the advantage of a policy and then again repeat mistakes. He said that in case of turnover tax the government increased this from 0.5 per cent to 1 per cent when even 0.5 per cent to 1 per cent is determining factor and greatly affects the industry. With rising costs of electricity, gas and other utilities and rising cost of doing business the whole
Government by discontinuing zero rating will definitely go once step back, he gave example of imposition of wealth tax which was implemented and then again withdrawn and wondered why the government first learns and agrees with the advantage of a policy and then again repeat mistakes this regard he proposed that the US government creates an endowment fund at customs stage and US government helps to pay custom duty which would amount to totally $300 million which will prove US long term relationship with Pakistan. Jawed Bilwani, Coordinator CAPTA stated that we are well aware that the government does not have any liquidity as a result of
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to a complete halt since last one year. Numerous notices of audit and discrepancies have become part of routine affairs which is adding to misery of the taxpayers. Jawed Bilwani said that the government should charge sales tax on retail sales which is not paid back and must exempt the manufacturers-cum-exporters because sales tax is taken and then given back which involves large government machin-
exercise of discontinuing zero rating will crush the entire textile sector. In conclusion, the entire 16 textile associations assembled at PHMA House, Karachi appealed the government specially President, Prime Minister and Finance Minister to continue zero rating of sales tax on the textile sector which would save huge amount of revenue.
UPCOMING
INVESTORS’ GUIDE
ANTI HARASSMENT LAW
BANKS SET TO COMPLY CODES Touseef Mallick
T
he State Bank of Pakistan has issued instructions to all the banks to comply with the 'Protection against Harassment of Women at Work Place Act 2010' displaying the Code of Conduct within their premises. The banks are also directed to form specific committees to address these complaints and ensure conducive environment for working women. The progress on implementation process was shared in the second meeting of Implementation Watch Committee here. The National Implementation Watch Committee formed on the instructions of the Prime Minister on the platform of National Commission on the Status of Women aimed is to oversee the implementation process of the anti-sexual harassment legislation passed in March 2010 by the present government. The chairperson of watch committee, Dr Fauzia Saeed appreciated this effort of the Bank immensely and said the provinces are now getting into the momentum and Punjab and Sindh governments have already initiated actions for implementation within the provincial departments and at the district level. However, she said that after the initial impetus the work needs to go on for sustained impact. The committee informed that some of the private sector companies like ICI, Engro, Lever brothers, Telenor, Lakson, and hotels like Serena and Marriott had their people trained by
Out of 44 Federal ministries 31 have complied with the law however, thirteen have still not done that despite the instructions of the PM AASHA and have shown high level of commitment to take the agenda forward. Out of 44 Federal ministries 31 have complied with the law however, thirteen have still not done that despite the instructions of the PM. Director Human Rights Commission, IA Rehman, also appreciated the work done so far by the members and said that "We should build on the positive work that has already been done". Ehsan Sadiq, from Islamabad police said that the police is planning to have three lady complaint cell and are thinking of other strate-
gies to get the mindset changed. Talking about the passage of the rules and establishment of the ombudsperson, Ministry of Women was requested to expedite the process. The meeting was attended by members including Omar Hameed Khan, PM Secretariat, representatives of other Ministries; Auditor General's office, Women's Ministry and FBR. Others include representatives of Pakistan Business Council, AASHA members and Deputy MD of Pakistan Television Shahid Mehmood Nadeem.
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ANALYSIS
INVESTORS’ GUIDE
GOVT PLOUGHS MORE IN AGRI FIELDS Raheel Amer
T
o support agricultural activities government announced many incentives directly related to agriculture sector like removal of sales tax on tractors and Benazir Tractor Scheme. Both these measures provided impetus for additional tractor demand due to lower prices (exemption of sales tax) and accessibility to lower income persons (in Benazir Tractor Scheme). With all these initiatives, tractor sales have witnessed an increase of 11 per cent to 38k units in 1H2010. Among two listed tractor assemblers, highest volumetric growth was witnessed in Millat Tractors (up 13 per cent) followed by Al-Ghazi (up 9 per cent). Hence, with higher volumetric sales (11 per cent) and better margins (up 160bps), the cumulative earnings of both the companies stood higher by 27 per cent during 1H2010. According to the research analyst of Topline Securities, Millat Tractor, which enjoys 56 per cent market share, witnessed volumetric growth of 13 per cent during 1H2010. The
Millat Tractor, which enjoys 56 per cent market share, witnessed volumetric growth of 13 per cent during 1H2010. The company was able to sell 21k units compared to 18.4k units in same period last year. Hence net revenues for the company improved by 20 per cent to Rs11.7bn compared to Rs9.8bn last year.
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company was able to sell 21k units compared to 18.4k units in same period last year. Hence net revenues for the company improved by 20 per cent to Rs11.7bn compared to Rs9.8bn last year. Along with volumetric growth, lower distribution expenses and higher other income provided strength to bottom line. Other income stood at Rs248mn, higher 82 per cent compared to Rs136mn in same period last year. This is on the back of higher cash placed in high yielding deposits. Hence, bottom line stood at Rs1.2bn (EPS of Rs42.65) during 1H2010, up 40 per cent from Rs892mn (EPS of Rs30.4) compared to same period last year. Despite 9 per cent volumetric growth, top line of the Al-Ghazi reduced by 2 per cent to Rs8.4bn versus Rs8.6bn last year. However, gross margin of the company stood at 19 per cent during 1H2010 versus 15 per cent last year. Company's cost
per tractor during this period stood at Rs403k versus Rs472k last year. On the other hand, price stood lower from Rs556k per tractor to Rs500k per tractor. This shows that the company did not pass on the cost impact fully to the consumers. The profitability was further cushioned by handsome other income which stood around Rs150mn, Thus, bottom line improved to Rs998mn compared to Rs878mn in same period last year. Floods to overshadow volume growth in 2H2010 According to the initial estimates by government and many donor agencies, the major losses are expected from agricultural sector, leaving farmers worst off. Along with this, with water still floating in many agricultural lands will dampen tractor sales in 2H2010. According to our discussion with the industry, tractor sales could plunge by 20-25 per cent in the month of August. This trend is likely to prevail in the short run.
TRADE & PACT
INVESTORS’ GUIDE
PAK, ITALY INK RS3BN DEBT SWAP AGREEMENT Touseef Mallick
I
taly and Pakistan signed Debt Swap Agreement (PIDSA) for projects worth totaling to an amount of Rs3.13 billion. The agreement was signed by Secretary Economic Affairs Division, Sibtain Fazal Halim and Italian Ambassador to Pakistan, Vincenzo Prati at the Economic Affairs Division (EAD). The Management Committee, established for selection approval and evaluation of the projects,
had approved an amount of Rs5.41 billion for F e d e r a l / P r o v i n c i a l Governments/NGO's and Italian Institutions in its third meeting held on August 19, 2010. Under the agreement, the development projects, sponsored by federal, provincial or local governments, non-governmental organisations or channeled by relevant UN Organizations on the agreed sectors would be financed. The agreed sectors to be covered under the agreement include health, education, agriculture,
basic infrastructure leading to socioeconomic development, and environmental protection. Speaking on the occasion, Secretary Economic Affairs Division, Sibtain Fazal Halim said that the Debt for Development Swap was the part of the dialogue Pakistan was having with various countries including Italy, Germany and Canada. He said that the Italy would write off the $100 million which would be utilised by the government of Pakistan for various development projects.
The agreed sectors to be covered under the agreement include health, education, agriculture, basic infrastructure leading to socioeconomic development, and environmental protection. INVESTORS’ GUIDE
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SPECIAL REPORT
INVESTORS’ GUIDE
Pakistan Strategic Allocation Fund managed by Arif Habib Invest
PSAF, NOW AN OPEN-END FUND MCB Bank Asset Management Company & Arif Habib Investment to merge Investors' Guide Report
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n an Extra Ordinary General Meeting (EOGM) of Pakistan Strategic Allocation Fund (PSAF); a close-end fund of Arif Habib Investments Limited (AHI); the certificate-holders have approved the conversion of the Fund into an Open-end fund subject to the approval of the Securities and Exchange Commission of Pakistan (the “SECP”) and fulfillment of all legal and regulatory formalities. The special resolutions for the conversion have been passed unanimously by the certificate holders present in person or as proxies in the meeting who were entitled to vote thereat. The mutual funds industry is increasingly becoming the Investment Avenue of choice in Pakistan and offers various investment products with different risk/return profiles. Arif Habib Investments Limited (AHI) is an asset management company managing 12 funds and is rated AM2 (Positive outlook), currently the highest Asset Management Quality rating in the industry. The Company is currently managing Rs. 15.948 billion (USD 185.657 million) as of 31st August 2010. AHI holds 8 open-end, 3 closed-end, 2 Pension Funds and 8 investment plans in its product portfolio to meet
the investment needs of its growing clientele. AHI continuously strives to provide attractive returns through a wide spectrum of investment solutions and set the highest standards in the Asset Management Industry through constant customer focus, special financial expertise, and total quality management. MCB Asset Management and Arif Habib Investments would be merged subject to all regulatory approvals and compliances. A Memorandum of Understanding (MOU) was signed in this regard by MCB Bank and Arif Habib Securities recently. The joint entity is expected to become the largest private sector asset management company. NIT, which is in public sector, will however remain the largest asset management company of the country. Both companies are working on valuations and due-diligence to take the deal further. They are also going to seek necessary legal approvals as they move forward. As independent entities MCB AMC and Arif Habib Investments manage approximately Rs31 billion (approximately $370 million) between them. Both companies are rated amongst the best managed companies in the country, and demonstrated visible strength during the severe liquidity crunch and cred-
it crunch of 2008. MCB AMC is a wholly owned subsidiary of MCB Bank Ltd and manages approximately Rs15 billion in five different funds. With a track record of over three years it is rated amongst the best and the largest AMCs of the country. Arif Habib Investments is a listed company and a subsidiary of Arif Habib Securities. The company made its first public offer of funds in 2002 and is recognized for its pioneering role in the industry. Arif Habib Investments has recently also sought legal approval for conversion of their closed end funds to open-end. The sponsors of both companies feel that the merger will strengthen business and benefit investing public. With shared resources, the merged entity shall be able to offer better services and a wider range of products catering to needs of different profiles of people. The merger is likely to provide the new entity the requisite critical mass to broaden the reach, which may serve as an agent of positive change and a much-awaited good omen for the industry. It will bring together rich experience and skill of the two groups in the financial sector. MCB Bank’s 1100 branches network in the country would provide wider reach to the various products being offered by the two asset management companies.
The Company is currently managing Rs. 15.948 billion (USD 185.657 million) as of 31st August 2010. AHI holds 8 open-end, 3 closed-end, 2 Pension Funds and 8 investment plans in its product portfolio to meet the investment needs of its growing clientele. INVESTORS’ GUIDE
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SPECIAL REPORT
INVESTORS’ GUIDE AID TO HELP UPLIFT OLD BUNKS
Karachi Port to get WB’s $115.8 million PAK MUST USE FLOOD AID RESPONSIBLY: ZOELLICK Investors' Guide Report
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orld Bank's Board of Directors has endorsed the $115.8 million Karachi Port Improvement Project. The financing will help reconstruct the country's largest port to relieve the capacity constraints and strengthen shipping revenues for the Pakistan economy. Port improvement is a key component of the National Trade Corridor Improvement Program (NTCIP), which was initiated by the Government of Pakistan in 2005. "Improving the efficiency of Pakistan's trade corridors is a key element of the Bank's support to trade facilitation in the country," Rachid Benmessaoud, World Bank Country Director for Pakistan, said according to a WB statement released from Washington. "Karachi Port, as the main international gateway, provides a key link to international markets and through efficient and cost effective operations can significantly reduce the cost of doing business in Pakistan. This operation will support both the provision of infrastructure capable of handling modern bulk cargo vessels and the institutional support required to promote international best practice in the management of port facilities." Finance from the Karachi Port Improvement Project will be used for the reconstruction of old and shallow berths which will reduce ship waiting times and provide the necessary capacity at the Port for long term growth. "The berths at the Karachi port are
too shallow and ill-equipped to handle heavy cargo," said Simon David Ellis, World Bank Task Team Leader and Senior Transport Economist. "Reconstruction of the failed berths is necessary to increase the effectiveness and efficiency of port operations, as well as to enhance its environmental sustainability." Furthermore, The World Bank and the United States have also urged Pakistan to take steps to reassure donor countries that it is capable of using their flood aid responsibly and transparently and that it can enact reforms. Massive flooding in Pakistan began in late July and swept through the country, leaving an area almost the size of England under water. The United Nations has said the floods affected more than 20 million people, damaged or destroyed nearly 1.9 million homes and killed 1,700 people. World Bank President Robert
Zoellick told a high-level UN meeting on Pakistan that Islamabad would have to prove its ability to manage foreign aid ahead of an October meeting in Brussels to review a flood damage assessment report the World Bank and Asian Development Bank are preparing. "To make most effective use of help and even to secure full donor support, the government will need a reconstruction founded on transparency, accountability, flexibility, backed by law," Zoellick said. "Senior Pakistani officials have told us that this is what they wish to do," he said. "Yet experience from many countries warns that the machinery tends to slide back to business as usual." He added that the Pakistani government should "continue to take concrete steps by the October meeting, backed by law, so we have an opportunity to build Pakistani ownership, governance and capacity."
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UPCOMING
INVESTORS’ GUIDE
Sindh ready to raise one-off ratable-tax T RADERS
SPEAK AGAINST HOUSE TAX
Raheel Ameer
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overnment of Sindh has finally decided to levy a one-off ratable-tax on properties in urban areas of Sindh on directives of the federal government to raise money for flood relief. The percentage of the tax not yet decided. Sindh excise and taxation department property wing has completed a survey for imposition of one-off tax over 150-yard to 3000-yard houses and flats and lands. According to learned sources, the practice in the province has been initiated on special directives of the President. President Asif Ali Zardari in an interview to British Financial Times has said that the tax over urban properties in Sindh cities and federal capital could raise Rs 7 billion ($82 million). The sources however said that
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Muttahida Qaumi Movement, the major political force in urban areas of Sindh has not yet taken any decision over the issue. A meeting of the party was held in London last week to discuss the issue. The business leaders have expressed their reservations over the imposition of tax on big houses as suggested by the President Asif Zardari in a recent meeting with trade representatives, this was stated by the prominent business leader and President, Pak-India Chamber of Commerce and Industry, S M Muneer. Speaking at a dinner hosted by him, Mian Zahid Husain and Khalid Tawab in honour of outgoing Administrator, DHA, Brig Khalid Masood Tirmizi and incoming President, Clifton Cantonment Board, Brig Anis Ahmed at a local hotel, Muneer said that following sheer objection by the business community to impose Flood Relief Tax,
Zardari suggested to impose house tax on big houses from 1000-yard and up in order to raise Rs 8 billion for flood affectees. The business representatives in the meeting however, opposed the levying of house tax as well on certain pleas as retired and pension-dependent people live in some of these houses and how they would be able to pay huge taxes. Muneer said that firm measures would have to be taken by the government to rehabilitate the flood affectees and revival of the economy. He further advised the government to minimise the non-developmental expenditures withdraw massive perks and privileges to ministers, assembly, government officers etc. to raise funds for rehabilitation of the IDPs. Senator, Abdul Haseeb Khan, MNA, Khushbakht Shujaat, Sardar Yasin Malik, Khalid Tawab, Brig Khalid Tirmizi and Brig Anis Ahmed also spoke on the occasion.
TRADE & PACT
INVESTORS’ GUIDE
PAK-US SIGN LPG TRANSPORT FUEL CONVERSION PACT
GOING GREEN Shiraz Ahmed
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Grant Agreement Signing Ceremony was held recently in the Ministry of Environment between Government of the United States of America, acting through the US Trade and Development Agency (USTDA) and National Energy Conservation Centre, Ministry of Environment for "Liquefied Petroleum Gas Transport Fuel Conversion Project" in Pakistan. Ceremony was held in the presence of Hameedullah Jan Afridi, Federal Minister for Environment, Muhammad Javed Malik, Secretary Environment, Dr. Sarwar Saqib, Chief ENERCON, Commercial Counselor of US Mission John Simmons and concerned officers and officials of the Ministry of Environment, Economic Affairs Division, USTDA and US Embassy. The grant agreement was executed and signed by Stephen C Engelken, Deputy Chief of Mission and Faridullah Khan, Managing Director (ENERCON) on behalf of the Governments of USA and Pakistan, respectively. At the time of serious energy crisis prevailing in Pakistan, Government of the United States of America has agreed to provide a grant of $0.482 million to ENERCON, the National Energy Conservation Centre under the Ministry of Environment for the Liquefied Petroleum Gas Transport Fuel Conversion (LPG-TFC) project. Stephen C Engelken, Deputy Chief of Mission in the ceremony expressed the commitment of the Government of USA for cooperation and collaboration with the Government of Pakistan in all fields of economy especially in trade and development. He explained that ENERCON will utilise the grant funds, on behalf of the Government of Pakistan to imple-
ment a project on LPG Transport Fuel Conversion in the country, which is expected to be completed by December 2011. It was further elaborated that a detailed and comprehensive feasibility study under this project will produce useful information and data with necessary analysis required to consider adopting liquefied petroleum gas (LPG) as a fuel source for land transportation operations in Pakistan. Supply and demand forecast and assessments, including supply from Persian Gulf, among other sources, shall also be carried out. The technical and operational specifications required to adopting LPG as a transportation fuel, including any infrastructure requirements, as well as the economic, financial and legal considerations will be worked out for the implementation of the project. The Federal Minister for Environment, Hameedullah Jan Afridi, while addressing at the occasion highlighted that under the LPGTFC project, the operational requirements to convert Karachi, Hyderabad, Multan, Lahore, Faisalabad, Peshawar and Islamabad/Rawalpindi bus fleets to LPG will also be assessed in detail. A comprehensive analysis will be
carried out demonstrating the viability of LPG as an alternative fuel to CNG and diesel and operational requirements needed to adopt LPG fuelled bus operations in these cities. He explained that based on detailed economic and financial analysis, the role of private capital and investment for implementation of the project will be determined to supply a bus fleet with LPG equipment on a commercial versus financial lease basis. He further added that the options shall be discussed with representatives of the World Bank, Asian Development Bank, and at least one other international financial institution that has made significant investments in Pakistan, before formulating final recommendations. The review shall identify potential negative and positive impacts, discuss the extent to which they can be mitigated, and develop plans for an environmental impact assessment as may be required under the rules and regulations in force in Pakistan, as and when the Project moves forward to the implementation stage. Moreover, necessary legal and institutional framework changes, as well as barriers to operation and remedies including regulatory requirements to minimize risk for potential investors shall be worked out and analysed It was brought out by Faridullah Khan, Managing Director ENERCON that the developmental impacts related to Project implementation with focus on key factors such as infrastructure, human capacity building, technology transfer/productivity improvement, and market-oriented reform, will also be clearly spelled out, which are intended to provide the decision makers and stakeholders with a broader view of the Project's potential effects on Pakistan.
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NEWS
INVESTORS’ GUIDE
Company & Industry News Parco restarts refining Pakistan's 100,000 barrel-per-day (bpd) joint venture Pak Arab Refinery Ltd (PARCO), which was shut by severe floods, has restarted its refining functioning. This means that Pakistan State Oil (PSO) would need fewer product imports to plug the supply gap. "The repairs to the refinery due to the flooding are more or less completed, and it should resume operations in the next two days or so," said a trading source. Due to the closure of the refinery, PSO has bought two jet fuel cargoes totaling 35,000 tonnes, and up to three parcels of gasoline totaling 105,000 tonnes for September delivery. The state oil firm is also seeking two 16,500-tonne lots of jet fuel per month for October and November via tender, with an option for a third cargo in November.
SECP registers 25 foreign cos in Aug The Securities and Exchange Commission of Pakistan (SECP) registered 25 companies having foreign investments in August. In addition, a US-origin company has also added to the country's corporate profile last month. Foreign nationals with investments in these companies are from the UK, the US, Australia, Canada, China, France, Iran, Iraq, Thailand, Turkey, South Korea, Afghanistan, and Kenya. Six companies belong to the trading sector and four companies to services. Three each work in fuel/ energy, and mining, two each in construction, healthcare and sports. Other three belong to power generation, tourism and information technology sectors. This is a manifestation that foreign investors are showing interest in diverse sectors of the country
Automobile sales on the uptick in Aug Sales of automobile grew 1.3 per
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cent to 11,076 units in the month of August 2010 as compared to 10,942 units sold a month ago. According to the latest data released by Pakistan Automotive Manufacturers Association (PAMA), however, during this month aggregate production of car, LCV, and pickup vans dropped 28.9 per cent to 10,240 units over 14,410 units in the precious month of July. The auto sales marked in August were against the general expectation that floods which have been playing havocs for more than a month would dampen auto sales. But, growth in sales hit the expectations. Among local auto assemblers, Pak Suzuki witnessed a substantial boost in sales during August. The auto assembler sold out 6,479 units in this month, recording a 43.9 per cent surge in its sales over 4,503 units a month earlier. On the other hand, Indus Motor recorded a major decline of 32.8 per cent in sale to 3,360 units as compared to 4,999 units. Notably, auto sale was meagerly up 0.5 per cent as compared to 11,017 units in August 2010. For two months (July-Aug, 2010), cumulative sales of car, LCV, and pickup rose 5.3 per cent to 22,018 units versus 20,913 units in the corresponding period last year.
NML profit-after-tax balloons 130pc Profit after tax of Nishat Mills Limited (NML), the country's leading textile mill, took a significant jump of 130 per cent to Rs2.91 billion in the fiscal year ended June 30, 2010. Last year, its net profit stood at Rs1.26 billion. According to the company's financial result posted to Karachi Stock Exchange (KSE), this has translated into earning per share of Rs8.29 diluted (basic Rs10.5) for the fiscal 2009/10 in a wide contrast to Rs3.61 diluted (basic Rs6.23) for the preceding year. Furthermore, NML also announced a final cash dividend at Rs2.5 per share that is 25 per cent for the year. NML earned good gross margin of 19.1 per cent during the year
owing to rise in cotton prices in the second half (Jan-June), according to a TFD analyst. The gross margin last fiscal year stood at 18.2 per cent. In addition, the mill saw 63.9 per cent boost in other operating income to Rs982 million from Rs599 million earlier while financing cost skidded 22.1 per cent to Rs1.12 billion as compared to Rs1.44 billion due to decline in Kibor rate. These factors resulted into major rise in profitability. Net sales of the company increased 32.1 per cent to Rs31.53 billion from 23.87 billion. Similarly, gross profit was up by 37.4 per cent to Rs5.98 billion in July-June 2010 versus Rs4.35 billion in July-June 2009.
Current account deficit surges 48.7pc in first-two-month The current account deficit of the country widened by 48.7 per cent to $944 million in the first two month of fiscal year 2011 (July- August) from $635 million during same period last year, the State Bank of Pakistan reported. Increase in current account deficit has mainly been driven by trade, and services deficits, although workers remittances helped reduce the current account deficit, according to the TFD analyst. Trade deficit during this period stood at $2.27 billion, higher by 15.9 per cent against $1.96 billion same period last year. Similarly, deficit on trade of goods & services combined surged by 16.3 per cent to $2.84 billion from $2.44 billion same period last year mainly due to higher service deficit of 17.9 per cent to $567 million against $481 million in 2MFY10. Current transfers were up 0.6 per cent at $2.3 billion including workers remittances of $1.72 billion along with $32 million inflow of FCA residents. Additionally, financial account massively down by 93 per cent to $141 million against $2.01 billion. However, in August, the deficit shrank by 47.7 per cent to stand at a provisional $324 million, against $620 million in July 2010.
NEWS
INVESTORS’ GUIDE
Company & Industry News KSE invites bids for membership Karachi Stock Exchange (KSE) invited bids to sell the membership rights of the exchange. According to a notice issued by KSE, bids are invited from the eligible individuals, and corporate bodies, financial institutions/banks (local and foreign). Any offer, if accepted, shall be subject to the terms and conditions and the membership criteria of the exchange which is available on exchange's website.
Orix Leasing reports profit after merger Orix Leasing Pakistan Ltd has posted a profit after tax of Rs104.483 million for the year ending June 30 after its merger with Orix Bank last year. According to financial results of the leasing company despatched to Karachi Stock Exchange here, the pre-tax profit touched Rs125.956 million for the period under review against a loss before tax of Rs428.714 in 2009. The earning per share stood at Rs1.27 in 2010 compared to a loss per share of Rs5.85 in 2009.
Qubee getting good response in Lahore, Islamabad Qubee, broadband internet company,, has launched USB device "Qubee Shuttle" to enable its users to use the internet on-the-go. The device is the best in class among the similar products being offered by other WiMAX providers in Pakistan as it has the latest technology which drastically improve performance to provide uninterrupted internet experience to the users", said a press release issued here on Wednesday. "Qubee has been actively involved in technology up-gradation since its launch in Pakistan and the introduction of unique, portable and reliable "USB Shuttle" is a reassurance of our commitment to provide our customers
amazingly reliable services. Furthermore now our customers can enjoy Unlimited downloads with the same worldclass service", said Mubashir Naqvi, CEO, Qubee, Moreover, Qubee is also getting good response from its customers in Lahore and twin cities of Islamabad and Rawalpindi where the service has been launched recently. "Response from users in Lahore, Rawalpindi and Islamabad is quite encouraging. We are covering almost 80 percent of urban areas of these cities and our team of experts is working hard to extend the coverage to the remaining areas", Naqvi added. "We are attracting new users by offering unmatched services for all segments of the market as well as serving the unsatisfied customers who have never been provided quality services," said Hashim Sheikh, Chief Marketing Officer, Qubee. "We are coming up with new and innovative products and services to cater to the needs of the market and launch of Qubee Shuttle reiterates our commitment to provide high speed and reliable broadband services to customers in Pakistan."
Shield Corp declares 10 per cent dividend Shield Corporation Ltd. has posted a higher profit after tax of Rs 22.134 million during the year ending June 30, 2010 and declared a cash dividend of Rs 1 per share. According to financial results reaching Karachi Stock Exchange (KSE) here, the pre-tax profit of the company has surged to Rs43.420 million as earning per share also increased to Rs5.68 during the period under review against Rs1.24 in 2009.
Allied-Modaraba announces 22.5 pc dividend Allied Engineering Management Ltd, the holding company of Allied Rental Modaraba has posted a record net profit of Rs 277.973 million for the year ending June 30 and declared a final
cash dividend of Rs 2.25 per certificate. According to information reaching Karachi Stock Exchange here, the gross profit of the company also jumped to Rs338 billion during the period under review as earning per certificate climbed to Rs4.63 compared to Rs3.60 last year.
Golden Arrow gives 17pc dividend Golden Arrow has posted a profit after tax of Rs 140.605 million for the year ending June 30, 2010 and declared a final cash dividend of Rs 0.85 per share. According to financial results of the company despatched to Karachi Stock Exchange here, the profit before tax was estimated at Rs 140.605 million for the period under review as earning per share was stood at Rs 0.92 compared to a loss per share of Rs 2.60 in 2009.
DG Khan Cement posts lower profit D G Khan Cement has posted a lower profit after tax of Rs 233.022 million for the year ending June 30. According to financial results of the company despatched to Karachi Stock Exchange (KSE) here, the loss before tax also declined to Rs 358.403 million as against Rs 776.900 million in the same period last year. The earning per share dropped to 72 paisa during the period under review compared to Rs 1.63 in 2009.
Abbott Labs posts higher profit The Abbott Laboratory Ltd has posted a higher profit after tax of Rs838.126 million for nine months ending August 31, 2010. According to financial results of the pharmaceutical company despatched to Karachi Stock Exchange here, the profit before tax has surged to Rs 1.182 million as earning per share also improved to Rs 8.56 compared to Rs 5.56 in the same period last year.
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NEWS
INVESTORS’ GUIDE
Company & Industry News Mobilink introduces int'l easy-load service Mobilink recently entered into a partnership with the international mobile airtime transfer company, TransferTo in order to widen its Jazz Load international transfers. Through this collaborative service, Pakistanis living outside of Pakistan will be able to send airtime to their loved ones in Pakistan. Bilal Munir Sheikh, Vice President Marketing Mobilink, said, "Jazz is presently offering the largest portfolio of value added services to its valued customers. With the addition of this international top-up service, we are pleased to expand our services and reach across the borders for ease and convenience of the Mobilink family." Eric Barbier, TransferTo Founder and CEO said, "We're extremely pleased to be collaborating with Mobilink to offer our customers a larger choice of Pakistan airtime top-up options. The service will greatly benefit Pakistanis abroad who want to send low cost, high value gifts to their loved ones back home as a complement to their cash remittances."
Samsung launches eco-bubble washer Samsung Electronics recently launched its new flagship front-loading washer, the Eco Bubble Washing Machine, during Europe's biggest consumer electronics fair, IFA 2010, held at the Messegelande, Berlin. This stylish washing machine has achieved up to 70 per cent energy conservation (30 per cent less than the limit for an "A Energy" rated washer). Category Head Home Appliances Fawad Raza Sayeed said; "Today's modern families want an easy-to-use washing machine that can take on larger wash loads and reduce their carbon footprint. The technology inside the Samsung Eco Bubble Washing Machine addresses this and incorporates our innovative design to make a truly stunning addition to the most stylish home."
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Kirmani takes charge of UBLFMs The Board of Directors of UBL Fund Managers (UBLFMs) announced the appointment of Tariq Kirmani as the new Chairman of the Board, said an announcement made here. In announcing the appointment, Atif R Bokhari, President of United Bank Limited (UBL) said, "I welcome Tariq Kirmani as the new independent Chairman of the UBL Fund Managers Board of Directors and am confident that under his chairmanship, UBL Funds will continue to sustain and further strengthen its leadership position as the first-choice investment solution provider with the best corporate governance and professional standards in the industry." Tariq Kirmani has served in senior positions of multinational companies. His last appointment was as Chairman of Pakistan International Airline (PIA), prior to that he was Managing Director of Pakistan State Oil (PSO). He joined the UBL Funds Board as an Independent Director in May this year. He currently also serves as Director on the Board of National Bank of Pakistan (NBP), Asia Care Health and Life Insurance Company, Marie Adelaide Leprosy Centre (MALC) and Pakistan Sports Trust, amongst others. Established in 2001, UBL Fund Mangers enjoys a 'High Management Quality' rating of 'AM2' by JCR-VIS - one of the highest ratings awarded to Asset Management Companies in the industry. UBL Fund Managers has a comprehensive range of investment solutions and is present in all major cities of Pakistan. above inflationary pressures. The Company as a policy does not Indus Motors charge this increase in price to all customers who have booked and paid prior jacks up car prices to this announcement and the Company Indus Motor Company has increased will fully absorb the cost impact on its car prices with immediate effect, orders in hand. The new prices will be stating the strengthening in the Yen as it applicable to all future orders and major cause. deliveries. In a statement issued here it was said that since Yen is at a 15-year high Wi-tribe supporting against major currencies thus making flood affectees the imported CKD and even local parts more costly as most of the raw materiWi-tribe employees organised a als are also imported, thus Indus motors 'Relief Drive' using donations from their salaries to support victims of the is forced to make this decision. It further stated that the retail prices devastating floods. of all Corolla variants will be increased Talking about the relief efforts, by Rs25,000 while Altis price will be Mustafa Peracha, CEO of wi-tribe increased by Rs35,000 which translate Pakistan said, "Considering the devasinto less than 2 per cent increase on all tation that has taken place, we felt it the models. was our obligation as members of sociThe Corolla prices have remained ety to reach out to those suffering in the unchanged since February 2010, while wake of the floods. I am proud to say during this period the Pakistan rupee that wi-tribers worked as one team and has depreciated by 8 per cent against initiated an internal relief effort drive to yen and the company has been absorb- not only contribute financially to the ing that cost over the last few months. cause, but also volunteered to visit the Extensive flooding in the country has affected areas ourselves." also taken a severe toll on the car sales wi-tribe employees volunteered their and has further added to the misery of time to procure, pack, transport and disan industry already plagued with the tribute the goods themselves.
FEATURE
INVESTORS’ GUIDE
Why people bankrupts T
he bankruptcy statistics are alarming everywhere especially in western world. The past few decades have seen a dramatic rise in the number of people that are unable to pay off their debts and legislators all around the world are engaged in addressing the issue with legislation that makes it harder to qualify for this status. Following is a list of the most common causes of bankruptcy in today's world. Medical Expense A study done at Harvard University indicates that this is the biggest cause of bankruptcy, representing 62 per cent of all personal bankruptcies. One of the interesting caveats of this study shows that 78 per cent of filers in USA had some form of health insurance, thus bucking the myth that medical bills affect only the uninsured. Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills - bills that can quickly wipe out savings and retirement accounts, college education funds and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not. Job Loss Whether due to layoff, termination or resignation, the loss of income from a job can be equally devastating. Some are lucky enough, in developed world, to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice. Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous. The loss of insurance coverage and the cost of insurance also drain the job seeker's already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in
time to keep the creditors at bay. Poor Excess/Use of Credit Some people simply can't control their spending. Credit card bills, installment debt, car and other loan payments can eventually spiral out of control, until finally the borrower is unable to make even the minimum payment on each type of debt. If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative. Statistics indicate that most debtconsolidation plans fail for various reasons, and usually only delay filing for most participants. Although home-equity loans can be a good remedy for unsecured debt in some cases, once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well. Family Crises In western world especially, the marital dissolutions create tremendous financial strain on both partners in several ways. First fall the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support and/or alimony, and finally the ongoing cost of keeping up two separate households after the split. The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony
can strip others of the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute. Unexpected Expenses Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force someone into bankruptcy. Many homeowners are likely unaware that they must take out separate coverage for certain events such as earthquakes. Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime. Furthermore, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs. The Bottom Line There are many reasons why taxpayers are forced-or choose-to declare bankruptcy. But many times, common sense, sound financial planning and preparation for the future can head off this problem before it becomes inevitable. Those who are contemplating this possibility should seek a credit counselor or financial planner before choosing this alternative. (Courtesy: Yahoo Finance)
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NEWS FEATURE
INVESTORS’ GUIDE
Global Competitiveness Report 2010-11
CORRUPTION, INFLATION STAND IN WAY OF BUSINESS Investors' Guide Monitoring
T
he widely prevalent concerns of civil society and opposition parties regarding rampant corruption in every government department received another lynchpin when recently issued Global Competitiveness Report 2010-11 termed corruption and inflation the top most problems for doing business in Pakistan. World Economic Forum (WEF) issues this report every year and ranks various countries according to their competitiveness. For this fiscal year Pakistan grabbed 123rd position as compare to 101st of last fiscal year and as compare to Bangladesh's stable ranking of 107th. Pakistan has been placed at 112th in the world ranking of institutions and at 110 in infrastructure. The report said among the factors that create problems for doing business in Pakistan included policy instability, inflation, inefficient government bureaucracy, crime and theft, access to financing, tax rates, inadequate supply of infrastructure, inadequately educated workforce, tax regulations, foreign currency regulations, poor public health, restrictive labour regulations. On macroeconomic environment, the country has been ranked at 133rd, Government budget balance at 90th, national savings rate at 89th, inflation at 137th, interest rate spread at 94th, government debt at 82nd, country credit rating at 125th. The financial market development is at 73rd in the world raking. Market size is at 31 in the world ranking as domestic market size index is 26th, foreign market size index is 61. The ranking of the country was at 107th for property rights and at 117th for irregular payments and bribes, at 86th for intellectual property protection and at 92 for diversion of public
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funds. Moreover, there is a significant lack of trust of the public in politicians; however standing of judicial independence is comparatively better at 74th. The business community in the country feels that the efficiency of legal framework in settling disputes is low as it stands at 103rd, the transparency of government policymaking is at 115th, business costs of terrorism in Pakistan is at 138th whereas the business costs of crime and violence is 126th, similarly organised crime is at 127th ranking, the reliability of police services is low, ethical behaviour of firms in Pakistan is also low. In Goods market efficiency, the ranking is at 91 in the world. Pakistan has cumbersome and large number of procedures required to start business, agricultural policy cost is at 106th, while prevalence of trade barriers in Pakistan is high at 106th ranking, the business community has also voted against the trade tariffs in the country. The labour market efficiency is at 131st. According to report, the countries that constitute the top 10 remain the same as last year, with some changes in rank among them. Switzerland retains its 1st place position, characterized by an excellent capacity for innovation and a very sophisticated business culture, ranked 4th for its business sophistication and 2nd for its innovation capacity. Sweden has moved ahead of Singapore and the United States to
claim 2nd position this year. The country benefits from the world's most transparent and efficient public institutions, with very low levels of corruption and undue influence and a government that is considered to be one of the most efficient in the world. Singapore maintains its position at 3rd place, still the highest-ranked country from Asia. The country's institutions continue to be assessed as the best in the world, ranked 1st for both the lack of corruption in the country and government efficiency. The United States continues the decline that began last year, falling two more places to 4th position. While many structural features that make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking over the past two years. Germany has moved up two places to 5th position. The macroeconomic environment has improved compared with other advanced economies (up from 30th to 22nd in this pillar). Japan moves up two places to 6th overall, maintaining its performance compared with last year, while some other countries in the top 10 have weakened (its score since last year remains unchanged). Finland and Denmark, while placed a bit further behind Sweden this year, continue to be ranked among the most competitive economies in the world, at 7th and 9th positions, respectively. The Netherlands moves up two positions to 8th place. Canada has dropped one place this year to 10th, with a stable performance and rounding out the top 10. India's performance remains quite stable, falling two positions to 51st but with a small improvement in score. Taiwan, China ranks 13th, one place lower than last year. Sri Lanka moved up to 62nd position this year, a rise attributable to improvements across the board.
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RISK & RETURN Investors' Guide Monitoring
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fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk. Many companies now allocate large amounts of money and time in developing risk management strategies to help manage risks associated with their business and investment dealings. A key component of the risk management process is risk assessment, which involves the determination of the risks surrounding a business or investment. Risk concerns the expected value of one or more results of one or more future events. Technically, the value of those results may be positive or negative. However, general usage tends focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost ("downside risk") or by failing to attain some benefit ("upside risk").
addressed. In risk management, the term "hazard" is used which means an event that could cause harm and the term "risk" is used to mean simply the probability of something happening. Financial risk is often defined as
the set of risk, regret and reward probabilities into an expected value for that outcome. Risk can be both negative and positive, but it tends to be the negative side that people focus on. This is because some things can be danger-
Risk can be both negative and positive, but it tends to be the negative side that people focus on. This is because some things can be dangerous, such as putting their own or someone else's life at risk. Risks concern people as they think that they will have a negative effect on their future There are many definitions of risk that vary by specific application and situational context. The widely inconsistent and ambiguous use of the word is one of several current criticisms of the methods to manage risk. In one definition, "risks" are simply the future issues which can be avoided or mitigated, rather than present problems that must be immediately
the unexpected variability or volatility of returns and thus includes both potential worse-than-expected as well as better-than-expected returns. In statistics, risk is often mapped to the probability of some event which is seen as undesirable. Usually, the probability of that event and some assessment of its expected harm must be combined into a believable scenario (an outcome), which combines
ous, such as putting their own or someone else's life at risk. Risks concern people as they think that they will have a negative effect on their future. Insurance is a risk-reducing investment in which the buyer pays a small fixed amount to be protected from a potential large loss. Gambling is a risk-increasing investment, wherein money on hand is risked for a
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possible large return, but with the possibility of losing it all. Purchasing a lottery ticket is a very risky investment with a high chance of no return and a small chance of a very high return. In contrast, putting money in a bank at a defined rate of interest is a risk-averse action that gives a guaranteed return of a small gain and precludes other investments with possibly higher gain. Economic risks can be manifested in lower incomes or higher expenditures than expected. The causes can be many, for instance, the hike in the price for raw materials, the lapsing of deadlines for construction of a new operating facility, disruptions in a production process, emergence of a serious competitor on the market, the loss of key personnel, the change of a political regime, or natural disasters. Means of assessing risk vary widely between professions. Indeed, they may define these professions; for example, a doctor manages medical risk, while a civil engineer manages risk of structural failure. A professional code of ethics is usually focused on risk assessment and mitigation (by the professional on behalf of client, public, society or life in general). In the workplace, incidental and inherent risks exist. Incidental risks are those which occur naturally in the business but are not part of the core of the business. Inherent risks have a negative effect on the operating profit of the business. Some industries manage risk in a highly quantified and numerate way. These include the nuclear power and aircraft industries, where the possible failure of a complex series of engineered systems could result in highly undesirable outcomes. The usual measure of risk for a class of events is then. In the nuclear industry, consequence is often measured in terms of off-site radiological release, and this is often banded into five or six decade-wide bands. In finance, risk is the probability that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Some regard a calculation of the standard deviation of the histori-
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In finance, risk has no one definition, but some theorists, notably Ron Dembo, have defined quite general methods to assess risk as an expected after-the-fact level of regret cal returns or average returns of a specific investment as providing some historical measure of risk. Financial risk may be marketdependent, determined by numerous market factors, or operational, resulting from fraudulent behavior (e.g. Bernard Madoff). Recent studies suggest that testosterone level plays a major role in risk taking during financial decisions. In finance, risk has no one definition, but some theorists, notably Ron Dembo, have defined quite general methods to assess risk as an expected after-the-fact level of regret. Such methods have been uniquely successful in limiting interest rate risk in financial markets. Financial markets are considered to be a proving ground for general methods of risk assessment. However, these methods are also hard to understand. The mathematical difficulties interfere with other social goods such as disclosure, valuation and transparency. In particular, it is not always obvious if such financial instruments are "hedging" (purchasing/selling a financial instrument specifically to reduce or cancel out the risk in another investment) or "speculation" (increasing measurable risk and exposing the investor to catastrophic loss in pursuit of very high windfalls that increase expected value). As regret measures rarely reflect actual human risk-aversion, it is difficult to determine if the outcomes of such transactions will be
satisfactory. Risk seeking describes an individual whose utility function's second derivative is positive. Such an individual would willingly (actually pay a premium to) assume all risk in the economy and is hence not likely to exist. In financial markets, one may need to measure credit risk, information timing and source risk, probability model risk, and legal risk if there are regulatory or civil actions taken as a result of some "investor's regret". Knowing one's risk appetite in conjunction with one's financial wellbeing is most crucial. A fundamental idea in finance is the relationship between risk and return. The greater the potential return one might seek, the greater the risk that one generally assumes. A free market reflects this principle in the pricing of an instrument: strong demand for a safer instrument drives its price higher (and its return proportionately lower), while weak demand for a riskier instrument drives its price lower (and its potential return thereby higher). "For example, a government treasury bond is considered to be one of the safest investments and, when compared to a corporate bond, provides a lower rate of return. The reason for this is that a corporation is much more likely to go bankrupt than the government. Because the risk of investing in a corporate bond is higher, investors are offered a higher rate of return." The most popular and also the most vilified lately risk measurement is Value-at-Risk (VaR). There are different types of VaR - Long Term VaR, Marginal VaR, Factor VaR and Shock VaR The latter is used in measuring risk during the extreme market stress conditions. Huge ethical and political issues arise when human beings themselves are seen or treated as 'risks', or when the risk decision making of people who use human services might have an impact on that service. The experience of many people who rely on human services for support is that 'risk' is often used as a reason to prevent them from gaining further independence or fully accessing the community, and that these services are often unnecessarily risk averse.
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CSR &
MUTUAL FUNDS
Investors' Guide Monitoring
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ocial responsibility is anyone's responsibility in this society and mutual funds are not outside to this. There are mutual funds that invest the assets under their management in stocks of companies that practice ethical practices and still are profitable. The companies that have a social concern and are active in community causes and practice environmental, moral and social ethics and have invested in the cause of up holding the ethos are attracted by mutual funds. Socially responsible funds choose stocks of companies after carefully screening to qualify them for investment. The socially responsible mutual funds essentially have a tough time in choosing a corporations stock before deciding on investing. In addition to In addition to screening their financial parameters in pre-qualifying stage, they have to tread a narrow path as to select a by double checking whether the companies' actual practices conform to their own declared policies and ethics. You know, ethics and principles mean different to different people as they both are highly subjective matters. Which Funds are Socially Responsible and What are Mutual Funds Rating? In May 1990, Kinder, Lydenberg, Domini & Company (KLD) introduced a system of rating and index for screening and ranking the mutual fund companies modeled on the S&P 500 index. DSI or Domini Social Index as it is called is a capitalization-weighted index and consists of approximately 400 stocks. All four hundred companies are industry representatives screened and hand picked for their particularly socially strong character. The screening of companies for the purpose of inclusion and rating is two tiered viz. exclusionary and qualitative. A highly concerned approach
adopted by exclusionary screening eliminates companies receiving revenue from alcohol and tobacco manufacturing or sales, products and services of gaming and companies whose revenues exceed 2 % by selling military weaponry. As opposed to this, the qualitative screening measures safety management at operational and products' level, employee relations, diversity of a company and environmental concerns and similar parameters. It is important to understand that quite a few companies were eliminated from the DSI for failing to qualify the screening long after their inclusion too. DSI mutual funds' rating has come of age and to become the bench mark for socially responsible mutual funds. Why Is It Important To Consider Such Funds? Active share holders are pillars of socially responsible mutual funds. The ownership responsibilities of share holders, though small, is taken seriously and exercised by voting whenever instances of deviations from their stated policies that are the very basis for their being on DSI. The US SEC stipulates companies to disclose proxy voting rights. These powers bestowed on the share holders also bind them morally to make a dif-
ference to the world and serve as a check and rejuvenating communities in distress, rededicating and engaging companies for causes of global warming and product and employee safety etc. Current Rating Investing In Socially Responsible Mutual Funds For long there has been an apprehension in the minds of investing public about the funds' potential to generating wealth. But the statistics are bright and crying to be verified. The assets under managements of these socially responsible mutual funds have reached close to $ 4 trillion in the year 2003. This is quite a mind boggling jump from the $ 1.2 trillion figure of 1997. As for investing in these funds here are a few points to ponder: * Go by mutual funds' rating. * Collect prospectus and check for the funds' objectives. * Do policies of funds on environmental and social matters satisfy you? * Do the funds provide a risk perspective and details of expenses & fees? * Do they meet your objective and at what yield? Some of the Popular Socially Responsible Mutual Funds Domini apart from rating mutual funds has also floated many funds with social concerns. A couple of them are here. * Domini Social Equity Fund * Domini Social Bond Fund * Domini Institutional Social Equity Fund * Domini European Social Equity Fund There are a host of companies that offer mutual funds that are ethical in their practices and investment choices too. The law and the responsible citizens have ensured that the ethos and values are not lost in the run up to mad rush for monetary gains.
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TRADE & PACT
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FEATURE
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UPCOMING
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