Layout Profit 7 pages_Layout 1 11/27/2011 8:33 PM Page 1
PTCL leading a silent revolution Page 2 The FDI prejudice
Killer investment strategies Page 8
Monday, 28 November, 2011
Govt advised to set up new IPPs before Pak-Iran project g
Br authorities have caught Philip morris Pakistan (PmP), formerly known as Lakson tobacco Company and owned by Philip morris International, for massive tax evasion in their imported brand of cigarettes. Federal Board of revenue (FBr) has issued show-cause notice to PmP asking them to pay evaded tax amounting rs300 million. Company was paying tax on import price while according to law tax should be paid on retail price. Company declared import price as retail price. Documents available with Profit reveal that scheme used to inflict this damage to national exchequer was patently simple but brazenly fraudulent. marlboro with actual imported price of more than rs140 was declared valued and priced by PmP at less than half its real value at rs64; thus real reducing tax liability. no FBr official was ready to speak on record against tax evasion because of certain political pressures but confident that PmP has deprived national exchequer of million of rupees. Sources said that for past many months, FBr had been investigating this matter in order to determine mechanism adopted for evasion of duty and taxes at import stage. During this exercise, it was revealed that PmP had been evading federal excise and sales tax and other taxes through under invoicing on their import of marlboro cigarettes into Pakistan. An official, who was also part of investigation, told Profit that it was duty evasion that had been going on for more than two years and damage inflicted was at least rs300 million. It was shocking to learn that purpose of this tax evasion fraudulent scheme was to deliberately keep prices of marlboro cigarette packets low thereby inflicting a huge loss to national exchequer. He said according to rules, tax is collected on retail price but PmP declared import price as retail price. “In retail price, all taxes like import price, excise duty and sales tax is included but PmP declared import price as retail price,” he said adding that the notices have been served. It is learnt that as soon as relevant officers of FBr finished their investigation, formal show cause notices were issued to PmP asking them to pay evaded taxes amounting to over rs300 million. According to sources, PmP’s reply to these notices was found to be unsatisfactory and rather aloof which left no choice for FBr but to take stern formal action for tax evasion against PmP. Hence, a final contravention report has been issued directing its field formations to recover evaded amount along with penalties and surcharges amounting to over a billion rupees.
Cost of nuclear energy currently 5-6 US cents per kWh Demand of national gas transmission network increases to more than 700 mmcfd ISLAMABAD AMER SIAL
FBR serves notice to Philip Morris for evading tax
overnment has been advised to start process for setting up new Independent Power Producers (IPPs) of 5,000 mW cumulative capacity. this would enable them to be ready for commissioning by the time natural gas starts flowing from Iran Pakistan gas pipeline in December 2014. An official source said minister for petroleum and natural resources Dr Asim Hussain during a recent eCC meeting proposed finalisation of a strategy to develop additional IPPs to utilise gas imports from Iran. meeting was informed IP gas pipeline, in its first phase, will support power generation of 5,000 mW. It was informed that based on current crude oil price, monthly gas import bill shall be in tune of $200-250 million, which was lowest as compared to other options of HSFo and rLnG. Finance minister Abdul Hafeez Shaikh also agreed to this proposal and said there appears to be a significantly less chance that government would not be able to economically use imported gas. It was informed that gas demand of power plants connected with national gas transmission network has increased to more than 700 mmcfd, source added. Government has already decided to dedicate imported gas through IP pipeline to power sector as power shortage is projected to exceed over 11,000 mW in next few years. Decision was made considering economic feasibility of Iranian gas as compared to price of other alternatives fuels such as furnace oil, LnG and coal. meeting was also informed that economic impact of alternate fuels indicates that using IP gas will result in average annual savings of $1.2 billion against using rLnG as alternate fuel at crude price of $100 per barrel. Present value of total savings comes to $10.9 billion. Using HSFo as an alternate fuel indicates that IP gas will result in average annual savings of $1.7 billion at crude price of $100 per barrel. Present value of total savings comes to $15.3 billion. meeting was informed that generation of 11,000 mW by 2020 was not possible through other resources like hydel and wind power as these were time consuming and involved heavy financial costs. It was explained that recent feed-in tariff of wind power generation approved by nePrA, was nearly 11 US cents per kWh higher than imported gas, while wind mills have an availability of around 30-35 per cent only. In case for hydel based generation there were seasonal fluctuations in availability of hydel power due to availability of water. Source said member of Planning Commission was of the view that while importing gas appears feasible, Pakistan should also simultaneously develop other alternative options such as nuclear power based generation. He mentioned that cost of nuclear energy is currently 5-6 US cents per kWh for existing plants and shall be 8 US cents per kWh for the new plants.
Pakistan’s external debts swell to $62b despite increased domestic loans g
State bank figures escalate to $57.586 billion g Govt’s foreign exchange liabilities shrink to $2.544 billion from last year’s $2.638 billion KARACHI
AkIStAn’S total foreign debts and liabilities have aggregated to $62 billion by 30th September this year, central bank reported. this is despite government’s exorbitant budgetary borrowings from local banking system that ballooned to rs719.726 billion during Julynov 11 FY12 compared to rs304.802 billion of corresponding period in FY11. ever since inflow of foreign financing, particularly that of ImF under 2008’s $11.3 billion Stand-By Arrangement (SBA), started depleting to an alarming level, the floods-
and terrorism-stricken government shifted its borrowing focus to domestic sources. According to State Bank data, resource-constrained Pakistan’s external debts and liabilities rose by 2.6 per cent or $1.59 billion to $61.835 billion. Cash-strapped country owed $60.236 billion to international lenders by same date last year in 2010. Apparent reason for increasing foreign debts is funds-starved government’s skyrocketing public debts that, SBP figures for review period show, escalated to $57.586 billion, up by $1.25 billion compared to last year’s 56.33 billion. of total public debts, loans secured and used by government accounted for $46.372 billion against
$44.786 billion of last year. this shows an increase of $1.58 billion or 3.5 per cent. Credits from the International monetary Fund (ImF) were among the few accounts that were set in the red zone and contracted by 2.6 per cent to $8.670 billion compared to 2010’s $8.908 billion. Government’s foreign exchange liabilities, including central bank’s deposits, foreign currency bonds, etc shrank to $2.544 billion from last year’s $2.638 billion. Whereas government’s medium and longterm loans from Paris Club, Saudi Arabia, China and other multilateral and bilateral lenders ballooned to $45.805 billion. Its short-term loans from Islamic Develop-
ment Bank (IDB) declined from $567 million against $880 million of last year. Public Sector enterprises (PSe) guaranteed debts increased by $35 million to $186 million compared to $151 million of 2010. While loss-making PSe’s non-guaranteed debts remained downward by $147 million at $926 million compared to $1.073 billion previously. Government borrowings from scheduled banks witnessed an astronomical trend and swelled by 163.4 per cent or $402 million to $648 million compared to $246 million previously. While government’s private guaranteed debt reduced to zero, its private non-guaranteed debts rose by $55 million to $2.365 billion
from $2.310 billion. Private non-guaranteed bonds, however, remained static at $124 million. Government’s official liquid reserves, which include sinking funds and cash foreign currency, increased to $14.668 billion against $13.386 billion during the period under review. With its external debts peaking to new highs and foreign financing shrinking to an alarming level, country’s economic managers are comforted by foreign exchange reserves that are fast declining and now stand at $16.9 billion. During first four months of FY12, country’s current account deficit has widened to $1.5 billion compared to $ 541 million of previous year.
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PTCL leading a silent revolution n
AveeD Saeed, Senior executive vice President Commercial of Pakistan telecommunication Company Limited in an exclusive interview with our correspondent Amer Sial says the company is focused on deploying most modern telecom infrastructure in the country to enhance data connectivity for businesses to increase their productivity and bring prosperity in the country. PT: What are PTCLâ€™s achievements during the last 6 years after privatisation?
NS: Before privatisation PtCL was a basic telephony company providing plain old telephony services. With privatisation there has been a phenomenal growth in the data connectivity and hundred of millions of dollars have been invested just for deploying latest telecom infrastructure in the country. We are providing backhaul to all the players for internet connectivity. We are also providing connectivity to big institutions like banks and other corporate entities for their services. Deployment of latest technologies have helped in significantly increasing efficiency of businesses and a seamless security has been provided in the deployment of It enabled services by the corporate sector. on the domestic front, previously there was only dial-up internet available but now DSL has become replaced dial-up internet. Speed has been increased from 256kB to 1mB and 100mB at
adopted. We are not a monopoly company anymore we are now a profit driven company. PT: Is there a decline in fixed line customers due to mobile phones? NS: Yes there was a shrink but it was not a massive one, as the voice business globally did transfer to wireless. However, we did not lose business from the corporate and small and medium enterprises as we focused on them even though some migration was witnessed on the domestic consumer side but it was minimal as compared to developed countries that lost in millions. We are not losing any more domestic customers as data connectivity is being provided on the fixed line. our PStn voice revenues are growing as we have made new offers at bundle level. the voice, broadband and IPtv services on fixed line have improved our revenues. We are growing at present as the majority of our new customers are broadband users. As the subscriber base will grow, there will be more appetite for bandwidth. there are four elements to data connectivity, firstly the platform; it is becoming better with new investment. Secondly the connectivity pipe is steadily growing, thirdly the appetite for internet usage is growing and lastly the devices they are coming in huge numbers with growing storage and fast processing speeds. even our phones have 32GB storage card. the appetite of consumers to digest and consume more is growing. the entire chain requires more investment and we are already on the move by investing more and
PTCL has more than 95pc customer share out of the total 750,000 broadband users in the country. The customer base will be reaching the 1 million mark very soon very affordable cost. Fibre to the home (FttH) technology is fully deployed; corporate solutions are being provided with dedicated customer services. Without these services no economy can move forward. on the wireless side, we deployed the latest CDmA 1X technology in the country. this year we launched high data speed evDo red B, which was the first launch in the world. the last six years has witnessed an organisational transformation and pay for performance culture was introduced, new professionals were hired, trained and groomed, processes were reengineered and an aggressive sales and marketing strategy was
more in telecom infrastructure. our objective is to keep enhancing the data pipe as more usage of applications will benefit us. PT: How do you compare Pakistan with other regional countries? NS: If we look at similar economies like Sri Lanka, Iran and Bangladesh we are far ahead but as compared to developed world we still require more penetration and growth to catch up quickly. DSL was launched in Pakistan three years back and it has recorded a fast growth as bandwidth
prices have become more affordable. We have complete network and ability to energise the copper lines with the right pricing mix. At present Pakistan is among the top five countries worldwide in broadband growth. PtCL has more than 95 per cent customer share out of the total 750,000 broadband users in the country. the customer base will be reaching the 1 million mark very soon. It will include customers using broadband over wireless and fixed line. We have made good progress but still there is a lot of room for enhancing penetration. According to international projections, machine-to-machine connectivity growth will be greater than the people connectivity in the next five years. PT: Any plans to acquire telecom companies? NS: Yes we are interested in acquisitions. We are looking at other entities for more acquisitions. We have already acquired and merged max Corp which was providing DnoBS services. We have made more investment than any other telecom company in Pakistan and hundreds of our new cell sites are coming up that will further increase connectivity. We are also investing in another undersea cable that will further increase the availability of bandwidth. Furthermore we have started cache services and search engine giant Google Pakistan is hoisted on our servers. Pakistanis happen to be one of the top gigabit users in the world, you will be surprised to know that
We are not a monopoly company anymore, we are now a profit driven company our per month usage is four times that of european users. our evDo service is 3G compliant even though no operator in the country offers 3G services. We have plans for 4G and have already tested Lte. that will give us a better network and PtCL will be the one of the most advanced operator in the world. PT: Are you satisfied with the regulatory atmosphere? NS: Yes we are satisfied with the regulator. Pakistani regulator is acknowledged worldwide for
its role in the promotion of the telecom sector in the country. Pakistan telecommunication Authority (PtA) has been advising and sharing experiences of other South Asian states with us. We are satisfied with PtA as they are becoming better by the day. PT: People term customer care a grey area after privatisation. What is your response? NS: no the impression is not correct. We value all our customers and customer care is one of our top priorities. We deployed an automated complaint management system to address consumer complaints within 24 hours after registering of the complaint. the system is fully automated and monitored regularly with update information on the progress of all the complaints. However, there are some gaps, for example there is lot of development activity in Lahore, people of one department without informing us in advance dig up the road sides and cut under ground cables, this causes some delay. With our automated system, the customers can fix all their complaints by simply making a call. We are also working to further improve the system. PT: What are your personal views on technology reshaping our lifestyle? NS: I think in this age and stage it is a duty on us all to do more for our country and for the prosperity of our people. Pakistan has all the ingredients to be a very successful country. We have a very good basic infrastructure in all the sectors, we have good institutions and human resource all we need is devising some processes for enhancing productivity that will lead to prosperity. We can achieve this by improving visibility to let people know what is happening and where the opportunities are. this will create a culture of accountability as people in authority will know which department was not performing its duties satisfactorily. the steps to curb inefficiency will lead to greater productivity and that will lead to prosperity of the people and the country. At PtCL we are focused on increasing our visibility by making investment in enhancing infrastructure, our data pipes are going everywhere; this will provide more connectivity, leading to more business opportunities and accountability and productivity. We are therefore leading a silent revolution in Pakistan.
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Monday, 28 November, 2011
The FDI prejudice
ometHInG on the lines of 50,000 industrialists refusing bill payments to keSC was bound to happen sooner or later. that they’d rather deposit due amounts elsewhere to protest power shortages shows they are willing to risk immediate disconnection even if it means permanent closure for most units. Concerning as the situation is, it still provides the government with an opportunity of ensuring a smooth resolution, in addition to reestablishing its authority. First and foremost, it must establish the truth behind the charge that keSC deliberately indulges in power cutting, citing inadequate gas supply from SSGC, to warrant increased subsidy. And once the investigation is complete, it must ensure swift redressal of genuine grievances, and take punitive measures where necessary. Already, the power crisis has crippled
industry, destroying its standing in regional and international markets. It is important to note that if this particular standoff is allowed to get uglier, then the government will be rightly blamed for letting crises simmer before turning its attention to fire-fighting and damage control, something it has made a habit of. If the situation worsens, markets and industrialists will not be the only suffering parties. Failure to posture proactively will further erode the government’s credibility. It is not long before these protestors go to the polls. Being in the market for ages, they are well aware of departmental tendencies towards excesses. If their hunch is right, and keSC is deliberately paralysing industry for its own benefits, those at the helm of affairs in Islamabad are likely to suffer as well. this matter is urgent, there can be no dilly-dallying.
Govt agrees on sovereign guarantee for PSM
Agriculture income tax, a misnomer
Pakistan Steel mills crisis are deepening further. to make the matters worse, even the banks have refused to give loans to them. the good news is that in order to keep the entity operational, the government has decided to give a loan of rs6 billion. the problem however, lies in the mismanagement that specifically rose during the tenure of the present government. We sincerely laud the current efforts of the finance minister, Hafeez Sheikh, in granting loan for restructuring to PSm, but now what should be stressed upon is the work on an all-encompassing business plan in order to make up for the huge losses.
Any tax on agriculture should be in "mundi", where all produce should ideally go. the British gave us that system which we ignored and tore down. People who bought "plots" in designated mundies lost their plots to “katchi Bastees” without compensation. the same is true for the greatest of all the assets left by the British our national canal system. the state of disrepair and neglect is appalling. Under these circumstances, no Agri tax is due to any government. We are however, forced to pay this so called "Jagga", provincial land rental tax, as if moguls kings are back and they are the rightful owners of all land of Pakistan.
SyED ABDuLLAH JAn
He years of 2005-2009 saw the largest amount of Foreign Direct Investment (FDI) routed into Pakistan in the last decade. However, a much talked about aspect is the notion that this ‘investment’ did not carry desired productive results. this stems from the eventual target industries where FDI made its way towards hardly into sectors where future economic benefit is thought to be derived from. Future economic benefit is a vague concept in itself; open to interpretation and dependent upon which angle it is perceived from. Proponents of allocative efficiency in a laissez-faire environment would treat all FDI the same, not differentiating between productive and unproductive inflows. there would not be a distinction between where investment is made, as gain is measured from the perspective of society as a whole. However, a very important drawback of this theory lies in its ignorance of inequality in terms of wealth accumulation that is created within the society – a shortcoming of the capitalist regime as a whole. In all honesty, I am not an advocate, as allocative efficiency; no matter how principally sound it may be is, but a theoretical concept which does not hold in entirety in practical life. Foreign Direct Investment – which ever form it was in – is now a fleeting memory of the economically boom years gone by. Since the investment friendly period of 2005-2009, FDI has seen a consistent drop each year that has passed. FDI was at a peak during FY08 at USD 5,401mln, falling all the way down to USD 1,574mln in FY11. SBP released figures show that the start of the current year has been worse, with FDI dropping 58 per cent YoY for the 4mFY12. this should not come as a surprise to us, given that the country has been plagued by the nuisance of terrorism, is still actively playing a part in a dead end ‘war’, and has been economically weakened, owing to a myriad of both internal and external factors. But a fact remains, that whatever inflows that occurred during the aforementioned ‘boom period’, little made their way into sectors deemed critical for aiding development in the country and hence, being a sustainable
Foreign Direct Investment is now a fleeting memory of the economically boom years gone by
Revisiting govt borrowing
Here suddenly seem to have emerged a plethora of variables for the layman to understand the direction that the fiscal deficit funded by government borrowing is taking. Since time and beyond, analysis has been silent with respect to tallying the government’s accounts, reported in the celebrated budget, with what happens each quarter. How can one, many would argue, take an independent view when there is no transparency? the tax collec-
tion break-up and consolidated numbers last updated on FBr’s website belong to the third quarter of last fiscal year. Why must one rely on government announcements, ever changing as they are, if there is to be any ‘just’ accountability of sorts? Diverging from this lament briefly, the ongoing quarter’s t-Bills’ borrowing trends seem to obfuscate the viewer; has Denice turned a new leaf or is he plotting a larger menace? While enlisting the ongoing quarter’s t-Bill targets, SBP had announced that the government intended to borrow rs63b in addition to the rolling over maturing amount. Lo and behold! It turns out that our dear government suddenly wants reduce its outstanding stock of t-bills, rs125b in the auction on 19th oct while taking up less than a hundred billion of additional debt in later auctions. In the meanwhile, our risk-disliking financial system continues to vigorously participate in these auctions hoping the government will
abide by its pre-announced targets. An obvious, allegation hurling explanation would be that the government seeks to shift its borrowing bulk into a lower interest rate pitch, an expected move that will be verified next week. With no substantive foreign inflows in the purview, one would not expect that an additional (approximate) rs100b in the ongoing quarter would embolden the government return about half of the amount to the financial sector. then come aboard other developments. earlier this month, half of the debt held by banks under the pretext of circular debt, approximately rs200b, has been converted in to 12mo t-Bills. this indirectly implies that the net increase government’s stock of t-Bills would arrive at twice the target amount announced for the ongoing quarter. the remaining amount has been conveniently shifted to 5-year PIBs. Who knows whose hands the fiscal machinery would have
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source of income generation for society at large. the top three sectors which saw the bulk of inflows in that period were telecom (36 per cent), Financial Businesses (21 per cent), and oil and Gas (13 per cent). Investment in the telecom sector saw the advent of a mobile purchase cacophony, where it is now very cheap to own and use a mobile connection. Yes, this may have made communicating considerably cheaper and may have provided employment opportunities, but apart from this, has led the nation into a consumer trap which is least bit productive. I fail to see how constructive activity, in turn, economic growth, can be achieved when everyone is busy texting or calling left right and center. now, investment in this sector has dried up, in fact, is on the decline, owing to profit repatriation which is an inevitable consequence of money being put into short term projects without a long term vision. the investments made in Pakistan over the past few years carry their own benefit, but are these greater than if investment would have been made in sectors which today are victims of severe deficiencies such as power, infrastructure, and education? key here is the distinction between near term gains and long term benefits. An investment in the financial context is defined as money being put into something with the expectation of gain within a period of time. It is natural and reasonable that profit repatriation would be the prime goal of a foreign investor. But from a local perspective, this should be in return for long-term boon that the country expects to take advantage from. Given Pakistan’s current status as a developing state, these should be in areas which would assist in the development of other local industries, provide ample employment opportunity, and self-generate other streams of income. In simpler words, help build a sustainable comparative advantage which can be utilised in future on a recurring basis. taking the example of India, FDI inflow rose by 50 per cent to USD 20,760mln during FY11 alone. But the key aspect of this is the eventual destination where investment has landed; sectors such as services, housing, real estate, construction, and power. these are mostly infrastructural developments where other industries are going to be taking much benefit from in the coming years. the idea is to invest in areas which offer a comparative advantage; or at the very least invest in areas which provide required support to the key sectors. India’s advantage may not lie in the power sector, or services sector, but surely these are protecting and nurturing the real key industries from where India derives its might. As an optimist and very much a patriot, I do believe in the potential our country harbours and see brighter prospects in future. But to learn from the past and our next door neighbour, it might be wise to think about incentivising the ‘right’ kind of investment in the aim to achieve long-term prosperity as a nation in whole. The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)
Is the government shifting its borrowing bulk into a lower interest rate pitch?
landed in by then! the resolution of the circular debt issue invokes a great deal of interest on its own. While it would relieve the government of intense political pressure, songs of joy would be easy to listen to on the banking square; risk weighted assets would decline as tFCs converted into PIBs would be shifted into the investments book basically accorded with zero risk. Currently, risk weighted assets stand at rs4,724b and can be provisionally expected to decline by at least rs100b. Some respite will be thus also be realised on the capital adequacy ratios (CAr) of banks exposed to the power sector, in addition to the paltry benefit of annulled nPLs in the power category standing at about Pkr 22bln in mar-11. In the way of some more government bashing (and reverting to the original
lament), all conjectures and estimates such as those listed in this column would be much aided, if for once, some transparency and public inclusion would be exercised by those sitting in the finance division. the only corroborated evidence available to analysts in form of what was said by whom. If the current government is the people’s only well-wisher since times and beyond then on the eve of re-election it should provide a clear and legible account of all that it has done for the people, if it has done any thing. After all, their proud proclamation of democracy should imply a little more than just grave problems for the people and by the people. The writer is an economic researcher and freelance financial journalist. She can be reached at email@example.com
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Indian and Pakistani business communities are willing to promote economic and trade relations with the idea of enhancing the volume of bilateral trade
LCCI President, Irfan Qaiser Sheikh
Channeling Halal food potential ANALYSIS ISMAT SAbIR
ALAL industry is a fast emerging business in the world, attracting both muslims and non muslims, especially non muslims due to realising the importance of halal food. As expert have opined that they are safer, hygienic, nutritious, having high quality and reliability. Halal food is consumed not only by 1.5 billion muslims around the world, but also by at least 500 million non-muslims, which shows that there is a big scope to enter in the halal food industry, to tap the world market. It is estimated that the annual halal food and non food products market is about $2.1 trillion of which about $80 billion is being exploited, which is 5 per cent of total trade of agri-food products. However, halal food trade may have a share of 20 per cent of world trade in food products in near future. While the market for about 1.4 billion muslims already exists, the demand for halal products is now on the rise across the globe. Due to lack of awareness about halal products in Pakistan, we hardly have any share in the global market of $600 billion. the thai consul general in Pakistan said over 1,800 factories are producing 57,000 different halal food products for exports after acquiring Halal Certification from authorities with advanced research facilities. there is great scope of setting joint venture in halal food sector between Pakistan and thailand. He assured all possible help in setting up joint ventures with Pakistani companies.
CHILE A HUB FOR HALAL FOOD Chile's ambassador in malaysia said the number of halal certified Chilean companies had grown from 25 to 45 within the first quarter of this year. It was claimed that the country can compete with any country as its halal products are of high quality. Chile had exported many of its halal meat products to other Islamic countries including the middle east and muslim African countries.
HALAL UNITS IN CHINA In ningxia, China, muslims account for around 38 per cent of the province’s
6.3 million residents. the province recently announced that it had developed a halal industry to accommodate not just the needs of Chinese muslims but also muslims in other countries. ningxia’s halal food commission said that the province had more than 10,000 factories and restaurants that were certified halal products. the region’s halal industry, which is supported by a high tech laboratory, 15 experts and 300 staffers, was currently worth up to 50 million rmB.
ENGRO EXPANDING HALAL TRADE engro intends to acquire Al Safa Halal unit. It will target the existing north American market, Canada and USA. Pakistan and malaysia have decided to utilise various options available under the Free trade Agreement (FtA) to boost economic relations and broaden the scope of bilateral trade, signed in January 2008. Pakistan malaysia Business Forum is exploring opportunities for joint ventures in sectors such as agriculture and halal industry which offered better returns and greater scope for growth given a growing demand for quality food and halal products in the region. Zubair motiwala, Chairman Sindh Board of Investment (SBI) said that Pakistan is going to start issuing halal certification by march, 2012. He said the SBI in collaboration with Halal Industry Development Corporation, malaysia, is working to develop halal industry and is committed to effectively implement the provisions of the moU signed between the two parties on Dec 1, 2010, in kuala Lumpur, for development of Halal sector in Pakistan. Pakistan can benefit from the halal standard, advance scientific knowledge and research experience of malaysia for developing and promotion of its halal products industry. Pakistan is the sixth largest milk producer, eighth in meat and tenth in poultry had a negligible share in the world halal food and services market. However, Pakistan is trying to develop halal services such as finance and banking and could easily develop other products in sectors like pharmaceuticals, insurance, etc. the experts say that the important factors are the standardisation and certifications of halal brands and logos which would make Pakistan hub of halal trade for the world and for the region, due to the proximity of middle east and central
Asian countries. moreover, halal food should be made tasty and pleasant with no chemicals and nice looking to attract consumers the world over and to compete haram food that is being made attractive for consumers to capture markets.
EXPORT POTENTIAL Pakistan can earn huge amount by investing into halal meat and exporting it after meeting local demand. european market size of halal food is about $66 billion while France having the largest share of $17 billion alone, stated by the vice Chancellor University of Agriculture, Faisalabad. He also said that only in Uk the halal meat sale is amounting to $600 million annually while the American muslims spend $13 billion on halal food per annum. the livestock contributed 55.1 per cent to the agriculture value added and 11.5 per cent to GDP during 2010-11 while its share last year was 53.2 per cent of the agriculture value added and 11.4 per cent to national GDP during 2009-10. In the current scenario of devolution under 18th Amendment, the responsibility of livestock development has been shifted to provinces and federal government will play facilitating role in national interest. the future plan for livestock sector is to meet mtDF targets for meat, 5.0 per cent and milk 8.0 per cent production through shifting from subsistence livestock farming to market oriented and commercial farming with a focus on entire market chain. the future plan also includes entering into global halal food trade market. Zubair motiwala, Chairman Sindh Board of Investment (SBI) said that the Pakistan is going to start issuing Halal certification by march, 2012.
HALAL FOOD CERTIFICATION SYSTEM the ministry is planning to create a halal food certification system in Pakistan. the system would help the country earn at least $600 million by exporting of halal products. Presently, there is neither halal infrastructure, nor a qualified certifier and whatever is to be exported in the name of halal has to be certified by a foreign inspection body, mainly malaysian companies. on August 18, a moU was signed between Halal research Council and Faisal-
abad Industrial estate Development (FIeDmC) for the establishment of m-3 Halal Park at the estate. It will be Pakistan’s first Halal park and from here Halal products can conveniently be exported. Such parks already exist in malaysia, Yemen, Britain and russia. A state-of-the-art facility is being set up by PAmCo costing $300 million with the cooperation of Iran, m-3 Halal Industrial Park at Faisalabad. A Halal Laboratory would also be set up at University of veterinary and Animal Sciences (UvAS), Lahore. An industrial park is proposed to be set up in karachi to facilitate growth of an export oriented halal business. the park will be a cluster of halal business industries to be built in a special zone where they will be provided infrastructure and halal related support services. For this purpose, the SBI has signed a moU with the Halal Industry Corporation (HDC), malaysia in December, 2010 at kaula Lumpur. the ministry of commerce imposed a ban on export of meat and live animals in July 2011 for three months to bring down the prices of beef and mutton which were becoming unaffordable for the common man. Although it was said that the purpose of the ban is to provide relief to the consumers but officials said that the decision was taken to meet the demand of Pakistan tanneries Association (PtA) whose members were facing the problem of shortage of hides and skins and high prices of raw materials, due to export of animals. they said exports of leather products fetch much more foreign exchange than those of live animals.
EXPORT OF MEAT PRODUCTS According to the Federal Bureau of Statistics, Pakistan’s export of meat and meat products touched the figure of $153.8 million in 2010-11, showing an increase of $99.3 million over the previous year. the official statistics indicated that 95,523 live animals were exported during 2010-11, July-march. About 153,543 animals were exported in the previous fiscal year which included 48,680 cattle, 50,000 buffalos, 54,716 goats and 147 camels. these were exported to Arab countries, Central Asian states and Afghanistan. there is no clash of interest between the two industries. the ban should have been restricted to animals only, sparing the meat. the export of tanned leather increased from $341.8 million a year ago
to $462.3 million in 2010-2011 and that of leather products rose from $458.6 million to $540.5 million. malaysia’s Department of Islamic Development has approved the Islamic Foundation Bangladesh (IFB) as a Halal certification body and, Bangladesh will soon start exporting halal food and other products, competing with Pakistan in this sector, besides textiles. the IFB has been included in the list of halal certification bodies worldwide, i.e. Bangladesh would take its share from the $660 billion global market for halal food.
EMERGING GLOBAL MARKET the emerging global halal food market has plenty of opportunities for further growth. thus, the market represents a strong economic opportunity for Pakistan and thailand. the thai government has lent the industry valuable support in developing a world class halal logistics system. thailand is currently the world's sixth largest exporter of halal food, accounting for $5 billion in international trade and providing food to 1.8 billion muslims in over 157 countries. As a large Islamic nation with strong agricultural base and good relations with muslim countries Pakistan may be a leading player in halal food trade. Punjab Industrial estate Development and management Company (PIeDmC) and the Government of malaysia have signed a moU for the promotion of halal product projects, which will help Pakistan in boosting halal products’ exports. Pakistan is among the top five milk and livestock producing countries in the world. therefore, Pakistani businessmen can avail this opportunity. PIeDmC Chairman S m tanveer pointed out that the dairy and livestock sectors currently performs well below its true potential. Pakistani halal food, which also includes poultry products, has vast export potential in european and other Western countries. the exports can be enhanced manifold in future, provided the sector receives official recognition. the private sector exporters of halal food said through adopting modern techniques and bettering sanitary certification procedures, the halal food exports could fetch more than $100 million in next two years for Pakistan, besides other products.
SCCI demands trade strategy for economic boost
Jinnah Power Project 1st unit to be operational in December
Traders protest wheat support price hike
LCCI urges State Bank to make 150-200 basis point cut
SIALKOT: Sialkot Chamber of Commerce and Industry (SCCI) has urged government to prepare an ultra modern advanced trade strategy for ensuring maximum consumption of Sialkot made traditional and non traditional export items in international and world trade markets, following global challenges of Wto. talking to journalists, SCCI President naeem Anwar Qureshi urged trade Development Authority of Pakistan (tDAP) to announce a special package of incentives for Sialkot business community, which is busy in earning foreign exchange to the tune of $1.25 billion, annually. He said Sialkot exporters have great potential for exploring and capturing international exports markets through diversification of traditional and nontraditional export items. He revealed that tDAP should also come forward in removing all bureaucratic maneuvers hindering national exports' enhancement.
LAHORE: 96 mW-Jinnah Hydropower Project is at advanced stage of its completion. First unit will start its operation by end of December this year. Full completion of the project is expected by middle of 2012. on completion, project will generate about 688 million units of electricity annually yielding an estimated benefit of rs6 billion every year. this was stated in a briefing made to WAPDA Chairman Shakil Durrani during his visit to Jinnah Hydropower Project – a run-ofthe-river scheme being constructed on river Indus adjacent to Jinnah Barrage in mianwali district. Chairman witnessed construction work on various components of project including power house, switchyard and headrace and tailrace channels during the visit. He directed project officials, consultants and the contractor to further gear up their efforts for completion of the project, which was adversely affected by devastating floods last year. Dilating upon least-cost energy generation plan, chairman said WAPDA is implementing several projects to harness vital resource of hydropower in the country. He said seven projects with cumulative capacity of about 1500 mW are under construction, out of those five projects of 400 mW will be completed in 2012. In addition, 4500 mW-Diamer Basha Dam and 84 mW-kurram tangi Dam have also been initiated. STAFF REPoRT
KARACHI: Wheat traders Association of Pakistan (WtAP) has protested against export cost for Pakistani wheat, which stands at over $305 per metric tonne (FoB karachi). “the current increase in the support price would further increase this cost,” said secretary WtAP Saleem Ahmed in a statement. It is to be noted that India and black sea prices consisting of russian and Ukrainian origin are at around $240 to $260 per mt which has made Pakistani export not only difficult but nearly impossible in international market. “the wheat exporters have painstakingly built-up export markets in the recent past which now would be lost to our competitors,” secretary noted with concern. Ahmed requested government to seriously look at ways to decrease the input cost to farmers so that wheat could be produced and exported at competitive prices as both farmers and exporters had a tremendous potential of producing bumper wheat crops. “this will also ensure affordable prices to our countrymen,” he said. STAFF
LAHORE: Lahore Chamber of Commerce and Industry Saturday urged State Bank of Pakistan to make another 150 to 200 basis point cut in policy rate in the third monetary policy, likely to be announced on 30th november. this step is touted to bring about revival of businesses, overcome low-growth scenario, to encourage new investments and give a jumpstart to the sluggish economy. In a statement LCCI President Irfan Qaiser Sheikh, Senior vice President kashif Younis meher and vice President Saeeda nazar said that availability of cheaper money to businessmen is a must to expedite process of industrialisation that would ultimately result in creation of jobs. LCCI officebearers said 150 basis point cut made after a long period of eight years by State Bank of Pakistan in previous bi-monthly monetary policy was quite encouraging but still interest rate needs to be brought down to single digit. LCCI office-bearers said ongoing economic scenario shows that there is hardly any time left for economic managers of the country to help stop industrial closures and defaults. therefore people sitting at the helm of affairs in government and State Bank of Pakistan should understand that a 50 basis point cut will be too minute for a tangible favour to business community, they reiterated. STAFF REPoRT
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Euro bonds are ‘not needed and not appropriate’ and would level the diﬀerence in euroregion interest rates
German Chancellor, Angela Merkel
What would happen if an asteroid hit US banks? WASHInGtOn
ver wondered what the US economy might look like should there be another Lehman Brothers-style bank collapse? Well, it would not be pretty. Unemployment could jump to 13 per cent, recalling the breadlines of the 1930s. the Dow Jones industrials might plunge 50 per cent to 5,668, a level last reached before the dot.com boom in the mid-1990s. At the depths of a brutal year-long recession, output might shrink at an 8 per cent annualized rate, wiping out two whole years worth of growth. Anyone lucky enough to have a job or cash left after the carnage could snap up a home at november 2000 prices. this dire picture is what the Federal reserve wants US banks to imagine when they test their balance sheets for resiliency against a major economic shock. So tough is the test that karen Petrou, managing partner of Federal Financial Analytics, quipped: "the only adverse event the Fed left out is a direct asteroid strike on a major banking center." It sounds shocking. But it's actually similar to the firestorm that swept through the United States after the shock bankruptcy of investment bank Lehman in September 2008, which ushered in the worst recession since the 1930s. next time around, however, damage could be even worse because the US economy would enter in a weakened state. It is still healing from the last recession and a second blow could be crippling. Few economists predict a US recession, though uncertainty is rampant. A reuters poll earlier this month put the risk at 25 per cent, down from 30 per cent the prior month, and recent US economic data has improved. the Fed last year began running banks through annual "stress tests" to measure how their balance sheets and capital buffers would cope with conditions in the consensus economic outlook, plus a major shock. on tuesday it announced details of how it will conduct its round for 2012 release. the latest stress test is tougher than the last -- little wonder, noted nomorua equity research, given europe sliding back into recession, China slowing, financial markets in
turmoil over the euro-zone sovereign debt crisis and an uncertain US fiscal picture. But richard Bove, a banking analyst at rochdale Securities, says it is irresponsible to put 31 US banks through a worst-case scenario. A stress test this tough risks forcing banks to prepare for the worst, possibly creating what regulators fear. "they are going to dump loans, they are going to stop lending and they are going to put us into the recession that the government wants to know how they will function within. "this is a really stupid stress test," Bove told reuters. Srinivas thiruvadanthai, director of research at the Jerome Levy Forecasting Center, disagrees. He welcomed the Fed's move, saying it will hasten a shrinkage of bank balance sheets that is much needed to match a slower-growing economy.
NOT FORECASTS the Fed stated in bold letters several times in its news release on tuesday that the
adverse conditions "are not forecasts but hypothetical scenarios." But the deep recession the Fed conjures is based upon actual experience of severe recessions, such as 1973-75, 1981-82 and 20072009. In fact, the numbers closely mirror the scale of damage from the Lehman bankruptcy, layered upon a weaker baseline. the Fed also notes risks from overseas. "An outcome like the supervisory stress scenario, while unlikely, may prevail if the US economy were to experience a recession while at the same time economic activity in other major economies were also to contract significantly," it said. If the United States were to enter a deep recession in the fourth quarter of this year, the Fed's worst-case scenario envisages the euro zone hit hard, suffering almost two year's of contraction until mid-2013, while output shrinks by a more than 6 per cent annualized rate at its depths.
‘Awful’ Italy debt sale heightens euro zone stress VALEntInA ZA REUTERS
tALY paid a record 6.5 per cent to borrow money over six months Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on rome's new emergency government. the auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures. though Italy managed to raise the full planned amount of 10 billion euros (8.6 billion pounds), weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market. Yields on two-year BtP bonds soared to more than 8 per cent in response, a euro lifetime high, despite reported purchases by the european Central Bank. In a sign of intense market stress, it now costs more to borrow for two years than 10 on the secondary market and borrowing costs for whatever term are above the 7 per cent threshold, over which Italy is likely to need outside help if they do not subside. "the pricing is awful," said Padhraic Garvey, rate strategist with Dutch bank InG in Amsterdam. "the object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say." Investors' attention will now turn to a bond sale of up to 8 billion euros that Italy is planning for next tuesday. "For the BtP auctions next week, we'll have more of the same they'll probably get it done at a concession," Garvey said. Italy's new technocrat government, which took power last week, is at work on structural reforms to revive the stagnant economy but markets are looking for quick and effective responses from european policymakers, such as a greater involvement of the european Central Bank. traders said the eCB was buying Italian and Spanish bonds in an attempt to shore the market up. But given its reluctance to prop up highdebt euro zone governments, its bond-buying program has been conducted intermittently, and never powerfully enough to provide more than shortterm stability. new Bank of Italy Governor Ignazio visco said short-term measures to tame Italy's budget deficit would not be enough to solve the country's economic problems and only structural reforms will generate growth. real purchasing power has fallen 4 per cent in 10 years.
BIG SPRING DEBT BILLS Since being thrust to the fore of the euro zone crisis in July, Italy has always managed to attract sufficient demand at its auctions. But record high yields threaten rome's planned gross issuance of 440 billion euros for 2012 as interest payments on the country's 1.9 trillion euro debt pile rise. the euro, already trading around a seven-week low, inched down after Friday's auction. european stock markets remained in negative territory for the day with the milan stockmarket the worst performer. the six-month yield nearly doubled from an auction level of 3.5 per cent a month ago. By comparison, Spain paid 5.2 per cent to sell six-month paper at a much smaller short-term auction earlier this week, after elections handed power to an austerity-committed conservative government. Italy also sold 2 billion euros of zero-coupon CtZ bonds at a euro era record high yield of 7.8 per cent, up from 4.6 per cent at the previous sale.
CORPORATE CORNER OPF Islamabad holds Annual Sports Gala
was attended by Chaudhry Wajahat Hussain, Federal minister for Human resource Development and Sheikh Waqas Akram, minister of State for Human resource Development. eoBI pensioners can register at telenor Franchises, telenor Sales and Service Centre or tameer Bank Branch with their eoBI pension book and original CnIC. PRESS RELEASE
of cooperation between Pakistan and Italy in the field of gems and jewellery sector. PRESS RELEASE
Changhong launches ‘Changhong Ruba’ in Pakistan
Italy assures to develop Pak gems and jewellery sector
ISLAMABAD: overseas Pakistani Foundation (oPF), held an Annual Sports Gala Ceremony at oPF, boys college, Islamabad. managing Director, Israr khan Jamali while addressing at the occasion said that provision of standard education to children of overseas Pakistanis is the priority of oPF. Principal of the college in his welcome address threw light on the achievements of the college and the end of the ceremony, the chief guest give away prizes to the position holders. PRESS RELEASE
Easypaisa enables EOBI pensioners to conveniently receive pensions ISLAMABAD: 300,000 pensioners of eoBI (employees’ old-Age Benefits Institution) would now be able to receive pensions through easypaisa scheme. An agreement to this effect was signed by Zafar Iqbal Gondal, Chairman eoBI and nadeem Hussain, President tameer micro Finance Bank. the ceremony
KARAChI: Amadeus Pakistan’s Mr h Zafar Ahmed presenting the ‘Top Icon Award 2011’ to Mr Fazal Mahmood, Managing Director of Sana travel and tours (pvt) limited, at a ceremony held at Marriott hotel, Karachi. PRESS RELEASE
LAHORE: Dr Federico Bianchi, First Secretary Head of the economic and Commercial office, embassy of Italy, Islamabad, in a meeting arranged by Italian-Pakistan business association, assured to promote and cooperate for the development of Pakistani gems and jewellery sector. He said that there is a great potential between Pakistan and Italian gems and jewellery sector and the Italian government will extend a bid hand in the development of this Pakistani sector. Italian-Pakistan Business Association President, Sheikh Ahsan rashid and its Secretary General muhammad naveed Hashmi briefed the Italian Ambassador, H e vincenzo Prati, about the scope
LAHORE: Changhong, China’s largest consumer electronics and home appliances manufacturer with a presence in more than 110 countries has shaken hands in collaboration with the ruba Group to launch its co-brand “Changhong ruba” and flat panel category products. Changhong’s higher management from China (mr Wujiang, vice President of Sichuan Changhong electrics Co Ltd, Chairman of Changhong overseas Strategic Business Unit) and ruba Group (mr muhammad Ayub, the President of ruba Group), graced the launch ceremony of the brand in Pakistan. Changhong ruba with its planned approach and marketing strategy seems all set to bring about a change in the maket and set new quality standards that would allow Pakistani consumers to enjoy a wide range of electronics at affordable prices. PRESS RELEASE
KARAChI: Ali Kamran, Director Sales ZoNg, Fan Yun jun, CEo China Mobile ZoNg, Dr Mirza Ikhtiar baig, Federal Advisor on Textile, Nisar Khoro, Speaker Sindh Assembly, Ishtiaq baig, hon. Consul general Morocco and Sajid Mahmood, Chief Information officer, ZoNg, at a dinner reception hosted by Fan Yun jun. PRESS RELEASE
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We call each other nearly each day to discuss our diﬀerent opinions, Nicolas Sarkozy said with regards to his communication with Merkel over the euro crisis
Nicolas Sarkozy weekly review
Volumes on KSE dip as investors remain cautious on new SPB policy rate 68 gain, 141 lose and 118 remain unchanged of total 327 scrips Local bourse gives deserted look as turnover shrinks further
KSE-100 index sheds 290 points as political strains take their toll g
KSE witnesses record low activity 73 gain, 150 decline and 97 remained unchanged of total 320 scrips traded NPB-NOV low volume leaded on future market
oLItICAL strains came to the forefront again as the kSe-100 index lost 290 points (-2.43% WoW). Investor interest continued to display a declining trend, with average daily volume coming at 34.4 million shares (-17.2% WoW). the lackluster activity witnessed was amid uncertainty regarding potentially flaring Pak-US relations and weak macro-economic data released which highlights the challenges for the country ahead. In the wake of this, foreign outflows of $ 3.8 million were seen during the week. the political situation has seen gradual deterioration since the start of november and it continues to take its toll as investors stay cautious awaiting some improvement in the overall environment. the ImF has recently released their economic review of Pakistan voicing concerns over a ‘challenging’ outlook that they foresee for Pakistan. this mainly centers upon the widening current account deficit, energy shortfalls, fiscal disciplines of public institutions, and debt servicing capacity. Such a view was reflected in the recently released current account numbers which saw the deficit widen to $ 1.55 billion in 4mFY12 owing to a bulging 54%YoY higher import bill on account of rising oil prices. Accordingly, ImF sees Pakistan’s real GDP growth at 3.5% for FY12 against the projected 4.5%.
Bears prevail at KSE as index further dips by 133 points 69 gain, 159 decline and 83 remain unchanged out of total 310 scrips traded Turnover at future market remains positive
KSE recovers by 95 points on renewed interest in commodity scrips 129 gain, 103 lose, 89 remain unchanged of total 321 scrips traded Trading volumes rise by 17 million shares
KSE sheds 81 points on institutional profit-taking ahead of SBP policy 78 advance, 123 decline, 109 remain unchanged of total 310 scrips traded KSE 30 index also remains negative
STOCK SPECIFIC ACTIVITY
FORWARD LOOKING EXPECTATIONS
rising public sector and external borrowing to unprecedented levels brought about similar concerns for power and banking companies respectively. Both sectors witnessed negative performance as confidence on the governments inaction to resolve circular debt diminished further. this comes on the back of the ImF negative projections for Pakistan and forced status quo expectations for the upcoming monetary policy. on the positve, fixation of wheat support price at Pkr 1,050 per maund bodes for the agri related stocks, mainly fertilizers, in terms of future offtake. However, much of this interest was reflected in positive spreads in the futures market rather than the ready market as investors remain uncertain for holding long positions.
In the coming week, fertilizer stocks will remain the forefront as far as activity is concerned given the recent trend of top volume stocks. the fixation of support prices for the upcoming rabi wheat season is good for boosting farmer income which traditionally has supported fertilizer and auto sales. the action of foreign sellers is also critical; week after week negative flows have been seen due to the fragile political and macro scenario. this also has implications for the upcoming monetary policy. With the SBP making intentions clear of following a looser mPS stance in the last policy review, fiscal leakages and disappointing numbers for public borrowing may not allow the central bank to drop the interest rate again. Analysts expect a status quo because of these risks entailed but the final decision – a tricky one – still remains to be seen.
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Thar Coal and Energy project is one of the important projects of Pakistan, essential for gasification, power generation and energy production
07 Killer investment strategies
Sindh CM, Qaim Ali Shah
nveStorS are getting nervous as markets are taking a volatile turn. Investors are conducting position audit of their asset allocation portfolio to hedge against wealth destruction. In the next 6months, investors might confront downside risk of the market. US economy is struggling to cope with low consumer confidence and de-leveraging by the corporate ahead of Christmas. the United States has ignored a “ticking debt bomb” in admitting defeat in reining in the country’s ballooning debt standing at $15 trillion. the US debt “miscarriage” on political wrangling ahead of a US election season would overshadow flimsy market confidence around the world. America’s nonsensical “domestic political wrestling” has proved its inability to “step up and shoulder its responsibility” to help spur sustainable and balanced growth in a bearish world economy. europe is taking care of the sick children (PIIGS and Hungry now) whose temperatures are not cooling down. Investors are shorting euro currency as markets are slapping from all sides to the unpredictable behavior policies of the european leaders. Global economy will slow down and grow by merely 3.3 per cent in 2012.
ASSET MIX STRATEGY Asset allocation is how you balance your wealth among stocks, bonds, cash, real estate, commodities, and precious metals in your portfolio. this mix is the most important factor in your investment making strategy as a success story. It’s 100 times more important than any stock pick. It’s 100 times more important than knowing the next hot country to invest in or what option to buy or knowing what the housing market is doing or whether the economy is booming or busting. I’ve seen ignorance of this topic ruin more investment portfolio value more than any other financial factor. many investors have no idea what sensible asset allocation is. So they end up taking huge risks by sticking big chunks of their portfolios into just one or two investments. For example, I have a friend who had most of her wealth in real estate investments in Dubai in 2006. When the market busted, she lost a huge portion of investment funds. While in new York in August-2011, I got an important insight from a major player in the global financial market. robert kapito, the president of Black rock asset was advising his clients: 60 per cent in stocks, 20 per cent in short term corporate bonds and 20 per cent in commodities.
FATAL MISTAKE Consider employees of big companies that put a huge portion of their retirement money into company stocks. employees of big companies that went bankrupt, like enron, WorldCom, Bear Stearns, and Lehman Brothers were totally wiped out. they believed in the companies they worked for, so they kept more than half of their retirement portfolios into company stock. It’s all because they didn’t know about proper asset allocation. Because of this ignorance, they lost their wealth. I’m sure savvy investors can see from these examples that asset allocation is so important because keeping your wealth stored in a good, diversified mix of assets is the key to avoiding catastrophic losses and wealth destruction.
SPREAD THE RISK - DIVERSIFY If investors keep too much wealth – like 80 per cent of it – in a handful of stocks and the stock market goes south, investors will suffer badly. the same goes for any asset gold, oil, bonds, real estate, or blue-chip stocks. Concen-
trating on your funds nest egg in just a few different asset classes is way too risky for you. Betting on just one horse is a fool’s game and a risky strategy. Spreading of risk is very important and can protect wealth.
ASSET CLASSES FOR INVESTORS PORTFOLIO Let me walk you through what asset classes are out there and what a sensible mix looks like? I. Cash is king in turbulent times First off, you have one of my favorite assets in the world, which is cash. “Cash” simply means all the money you have in savings, checking accounts, certificates of deposit (CDs) and treasury bills. Anything with less than one year to maturity should be considered cash. I recommend my investors and clients to keep plenty of cash on hand so that they can be ready to buy bargains in case of a market collapse. Investors flush with cash are often able to get assets cheap after a collapse – they can swoop in and pick things up with cash quickly, and often at great prices. Warren Buffet is a good example and he has shown his worth in these risky times. $10 billion cash investment that he is making in under-valued stocks with high potential. I generally recommend my clients of holding between 10 per cent and 45 per cent of their assets in cash, depending on their risk-reward strategy. In fact, one of the major tenets of good financial planning is to always have at least 12 months of living expenses in cash in case of disaster. If investors haven’t started saving yet, this is the no 1 thing to start today. II. STOCKS ARE RISKIER THAN BONDS IN THE LONg RuN: Investors should have conventional stocks. these are investments in individual businesses, or investments in broad baskets of stocks, like mutual funds and exchange-traded funds (etFs). Stocks are a proven long-term builder of wealth, so I think almost everyone should own some. But keep in mind; stocks are typically more volatile than most other assets like bonds. Investors should stay diversified overall with their asset class with dividend paying stocks. I think investors should stay diversified in their stock portfolio. I once heard a well-known tv money show host ask callers: “Are you diversified?” According to him, owning five stocks in different sectors makes you diversified. this is simply not true. It is a dangerous notion. Famous economist Harry markowitz modeled math, physics, and stock-picking to win a nobel Prize for the work on diversification. the science showed you need around 12-18 stocks to be fully diversified. Holding and following that many stocks might seem daunting – it’s really not. Holding stocks in dividend paying companies is a wealth builder of your portfolio. keep your portfolio valued and safe against economic turbulence. the problem is easily solved with a mutual fund that holds dozens of stocks, which of course makes you officially diversified. III. Fixed income securities: next for investors is fixed income securities, which are generally called “notes” or “bonds.” these are basically any instrument that pays out a regular stream of income over a fixed period of time. At the end, investors also get their initial investment – which is called their “principal” – back. Depending on the investors age, liquid position, exit strategy and tolerance for risk, bonds sit somewhere between boring and a godsend. the promise of interest payments and an almost certain return of capital at a certain fixed rate for a long period of time always lets investors sleep well at night. Adding safe fixed-income bonds to the investor’s portfolio is a simple way to stabilise their investment returns over time. For investors/ clients with enough capital, locking up extra money [more than 12
months of their expenses] in bonds is a simple way to generate more income than a savings account. IV. Real estate: Another asset class is real estate. every investor knows what this is, so I don’t need to spend much time covering this. If investors can keep a portion of wealth in a paid-for home, and possibly some income-producing real estate like a rental property or a farm, it’s a great diversifier. Investing in farm land/agriculture in the next 5-years is a wealth protection strategy for the global investors. V. Insurance of wealth: gold and silver: this is the best asset class in the current scenario. Do I consider precious metals, like gold and silver, an important piece of a sensible asset allocation? I do. Gold and silver are like insurance of wealth. Precious metals like gold and silver typically soar during times of economic turmoil, so I want my clients to own some “just in case.” But I’m different than the standard owner of gold and silver, who almost always believes the world, is headed for hell in a hand basket. I’m a major optimist, but I’m also a realist. I believe in owning insurance. I believe in staying “hedged” and ahead of the game. For many years, my job at a British bank was to develop and implement advanced hedging strategies for wealthy clients and corporations. the goal with these strategies was to protect jobs, wealth, and profits from unforeseen events. During those years, I learned a big difference between wealthy people and poor people. Wealthy people almost always own plenty of hedges and insurance. they consider what could happen in worst-case scenarios and take steps to protect themselves. Poor people tend to live with “blinders” on in difficult times. So just like I wear my seat belt while driving, my clients own silver and gold – just in case. For most people, most of the time, keeping around 15-25 per cent of their wealth in gold and silver provides that insurance. Chinese government has already advocated her people to place 25 per cent of their portfolio in Gold and Silver. Queues outside banks are huge in Shanghai/Beijing for clients who want to own physical Gold and Silver.
STRATEGIC FINAL THOUGHTS that’s a great view of gold and silver in asset allocation. So, I have covered five broad categories... cash, stocks, bonds, real estate, and precious metals. Do I have any guidelines on how much of each asset folks should own? there’s no way anyone can provide a “one size fits all” allocation. everyone’s financial situation is different. Asset allocation advice that will work for one investor can be worthless for another investor. But most of us have the same strategic goal: wealth preservation, picking up safe income and safely growing our nest egg. We can all use some guidelines to help make the right individual choices. keep in mind, what I’m about to share are just important guidelines for the investors
INVESTORS GUIDELINES If you’re having a hard time finding great bargains in stocks and bonds, I think an allocation of 25%... even 50% in cash is a good idea. this sounds crazy to some people, but if you can’t find great investment bargains, there’s nothing wrong with sitting in cash, earning a little interest, and being patient. If great bargains present themselves, like they did in early 2009, you can lower your cash balance and plow it into stocks and bonds. As for stocks, if you’re younger and more comfortable with the volatility involved in stocks, you can keep a stock exposure to somewhere around 33 per cent – 50 per cent of your portfolio. A young person who can place a sizable chunk of money into a group of high-quality, dividend-paying stocks and hold them for decades, will grow very wealthy. If you’re older and can’t stand risk or volatility, consider keeping a huge chunk of your wealth in cash and bonds like a 75 per cent - 80 per cent weighting. near the end of your career as an investor, you’re more concerned with preserving wealth than growing it, so you want to be very conservative. As you can analyse from the above guidelines, the big thing to keep in mind with asset allocation is that you’ve got to find a mix that is right for you that suits your risk tolerance and your station in life. Whatever mix you choose, just make sure you’re not overexposed to an unforeseen crash in one particular asset. this will ensure a long and profitable investment portfolio. Happy investing in volatile times with diversified portfolio. Shan Saeed is a financial market economist and commodity expert with 12 years of financial market experience. He graduated from University of Chicago, Booth School of Business, USA & IBA Karachi. He can be reached at. Blogs at www.economistshan.blogspot.com
CURRENCY MARKET FOCUS
‘Can you smell the fear of Sarkozy’?
tALIAn financial reporter Fabrizio Goria summed up last week’s merkelSarkozy-monti summit aptly in his twitter message, “Can you smell the fear of Sarkozy about FrAAAnce?” as Fitch moved from rubbishing Portuguese outlook to investigating debt and deficit pressures bearing down on France’s AAA rating. merkel’s uncompromising nein to eurobonds and eCB’s lender-of-last-resort lifeline shows the troika wasn’t holding any aces close to its chest after all, in keeping with this column’s expectations. All they had was a rehash of the same desperation tactics which, ironically, have failed to find support in Berlin. most likely, France’s weaknesses will be exposed next as merkozy gives way to mermonti to talk up markets for the remainder of the euro’s endgame. I feel it would be incrementally better for the euro if eU’s top leaders met less often. If I decipher merkel’s position correctly, she has finally explained the paradox of her stance, at once promising safeguarding the single currency while ruling out the only measures guaranteeing immediate-term survival. If the setup must become a transfer union, which preserving the euro demands, it must first turn distinctly political. Such a landmark shift will no doubt stimulate special irony in the French left that bullied Germany into accepting the currency union in return for unification when mitterrand and Schroeder decided the continent’s fate. Ironic because far from achieving more political muscle for France and less economic influence of Germany, it has concentrated both at unprecedented levels in Berlin. more than the eurobond no, merkel’s aversion to moral hazard is reflected in ruling out the eCB’s monetary faucet even as banks face a near-dry wholesale funding market, inter-bank lending is extremely stressed and billions in investor funds are fleeing europe. With the eSFS initiative proving a non-starter, both sovereign and bank failures have become a real possibility. Germany’s central-role demands will require constitutional revisions and subsequent ratifications from all member states. It is not possible to reorganise at that level in time to prevent the euro’s immediate collapse. Sell the euro on rallies. Short with abandon. the 1.30 level will be tested a lot sooner than most had expected only a couple of months ago. europe’s hangover is now clearly showing in Asia, where markets have dipped four weeks in a row. Commodity currencies too have a pretty clear, depressed outlook as mr market prices in the troika’s failure to revive confidence amid growing doubts about American banks’ exposure to european debt. Downgrades, choked capital markets, split in the troika, enhanced possibility of bank-runs, Germany’s failed bond auction, all tighten the noose around the euro. europe’s best possible future from here is a deep, protracted recession in ’12, made worse by strict austerity. It’s best not to flirt with the market when volatility makes entering similar to catching falling knives. As soon as merkel’s hints are digested across europe, which shouldn’t take more than a few weeks, the euronarrative will assume a definitive direction, bringing sense and correlation back to aussie, loonie, cable, kiwi, etc. But for now, discretion is the better part of valour, safehaven dollar inflow and frantic euro-selling is assured, and risk aversion remains strongly entrenched. And before euro falls, it will bring down the façade hiding the financial sickness in France, and Humpty Dumpty will come falling down. Comments & queries: email@example.com