Why Not Invest in Pakistan

Faisal Hasan KAMCO ASSET MANAGEMENT 715011
SPECIAL REPORT
Avoid Pakistani Stocks
September 17, 2014

editor@bcaresearch.com TEL 514.499.9550 www.bcaresearch.com Copyright 2014 BCA Research Inc. All Rights Reserved. Refer to last page. 1
Editorial Board
Arthur Budaghyan
Managing Editor
Chen Zhao
Managing Editor
Jean-Laurent
Gagnon
Editor/Strategist
Rajeeb Pramanik
Associate Editor
Santiago E. Gomez
Associate Editor
Jackie Huang
Senior Analyst
Karim Aita
Research Analyst
EMERGING MARKETS STRATEGY
In this Issue:
F
Structural Backdrop:
Dismal As Ever .......... 2
F
Cyclical Headwinds
Ahead ........................ 7
F
Socio-Political
Dynamics Remain
Complicated ............ 11
F
Investment
Conclusion .............. 12
F
The rally in Pakistani stocks is
over; share prices are set to re-
lapse.
F
Pakistan has an extremely low
national savings rate that has con-
strained capital investment. This
has endangered the economys
productive capacity and eroded
its competitiveness.
F
Odds are that borrowing costs will
rise if the government does not
rein in its ballooning spending,
or if foreign funding diminishes.
F
The Pakistani economy is facing
either higher borrowing costs or
a meaningful retrenchment in
government spending. Either way,
growth will suffer materially.
CHART 1
Pakistani Equities: A Major Top?
240
200
160
120
80
40
1995 2000 2005 2010 2015
240
200
160
120
80
40
PAKISTAN: STOCK PRICES IN USD*
400-DAY MOVING AVERAGE
*SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
BCA Research 2014
This week BCA is holding its annual investment conference in New York and we are publishing
a Special Report on Pakistan. We will discuss mainstream emerging markets next week.
P
akistani stocks have had a remarkable rally over the past few years, both in absolute
terms (Chart 1) and relative to their emerging markets (EM) brethren. The question is
how much more gas is left in the rally?
Our analysis suggests that the rally was built more on fscal largesse, foreign sovereign
support and euphoria over the countrys frst-ever democratic transition of government.
Meanwhile, there has hardly been any discernible improvement in the economys long-
term fundamentals. If anything, the macro backdrop has worsened over the past several
years, necessitating an IMF bailout.
EMERGING MARKETS STRATEGY - SPECIAL REPORT SEPTEMBER 17, 2014
BCA RESEARCH INC.
30
28
26
24
22
20
18
16
14
2000 2005 2010 2015
30
28
26
24
22
20
18
16
14
20
18
16
14
12
10
8
20
18
16
14
12
10
8
GROSS DOMESTIC SAVINGS PLUS
OVERSEAS WORKERS' REMITTANCES:
PAKISTAN
BANGLADESH
SRI LANKA
% of
GDP
% of
GDP
GROSS DOMESTIC SAVINGS*:
PAKISTAN
BANGLADESH
SRI LANKA
% of
GDP
% of
GDP
*SOURCE: WORLD BANK
CHART 2
Pakistan's Savings Rate Is Very Low
BCA Research 2014
The lack of domestic savings in Pakistan will
push up borrowing costs and force the govern-
ment to curb spending. Cutbacks in public
spending in turn will entail a considerable
growth downturn in the medium term, making
Pakistani risk assets vulnerable.
Structural Backdrop:
Dismal As Ever
Even though the stock market has rallied con-
siderably, Pakistan remains mired in a vicious
cycle of low income, meager savings, paltry
investment, slowing productivity gains and, in
turn, muted income growth:
F
The country barely saves. As Chart 2 shows,
the domestic savings rate has steadily fallen
to 8% of GDP from double that fgure a
decade back. The difference is stark when
compared to its South Asian neighbors Sri
Lanka (20%) and Bangladesh (19%).
The picture does not improve even if
overseas workers remittances are added
to gross national savings (Chart 2, bottom
panel).
F
The nations meager savings rate has con-
tinued to severely restrain capital invest-
ment. At barely 13% of GDP, the countrys
capex is grossly inadequate to expand
productive capacity and infrastructure.
The situation has actually worsened over
the past decade. Again, the difference is stark when compared to neighboring Sri Lanka and
Bangladesh, where capex is at 27-29% of GDP (Chart 3).
Defcient capital spending is pervasive in Pakistan. Neither the public nor private sectors has
invested meaningfully (Chart 3, bottom panel). For example, industrial sector capex has dropped
to just 1.5% of GDP down from 6% in 2004.
BCA RESEARCH INC.
4
3
2
1
0
1985 1990 1995 2000 2005 2010 2015
4
3
2
1
0
8
7
6
5
4
3
2
1
8
7
6
5
4
3
2
1
PRODUCTIVITY GROWTH**
LABOR FORCE**
Ann%
Chg
Ann%
Chg
PAKISTAN
GDP GROWTH RATE*:
REAL
POTENTIAL
Ann%
Chg
Ann%
Chg
*POTENTIAL GDP GROWTH RATE = LABOR FORCE GROWTH RATE
PLUS PRODUCTIVITY GROWTH RATE
**SHOWN AS A 5-YEAR MOVING AVERAGE; SOURCE: THE CONFERENCE
BOARD, TOTAL ECONOMY DATABASE, JANUARY 2014
CHART 4
Productivity Plunge Dragged Down
Pakistans Growth Potential
BCA Research 2014
16
14
12
10
1998 2000 2002 2004 2006 2008 2010 2012 2014
3.2
3.0
2.8
2.6
2.4
2.2
2.0
28
24
20
16
12
28
24
20
16
12
32
28
24
20
16
12
32
28
24
20
16
12
PAKISTAN REAL CAPEX*:
PRIVATE SECTOR (LS)
GENERAL GOVERNMENT (RS) % of
GDP
% of
GDP
NOMINAL CAPEX AS A % OF NOMINAL GDP:
PAKISTAN
BANGLADESH
SRI LANKA
% of
GDP
% of
GDP
NOMINAL CAPEX AS A % OF NOMINAL GDP:
PAKISTAN
INDIA
INDONESIA
% of
GDP
% of
GDP
*SOURCE: PAKISTAN BUREAU OF STATISTICS
CHART 3
Pakistan:
Capital Expenditures Are Depressed
BCA Research 2014
F
The lack of capex has steadily lowered
the countrys productivity, which in turn
has eroded the nations growth potential
(Chart 4). Relative to other economies at
a similar stage of development, Pakistans
productivity has dramatically lagged
(Chart 5).
BCA RESEARCH INC.
86
84
82
80
78
76
74
1985 1990 1995 2000 2005 2010 2015
86
84
82
80
78
76
74
12
11
10
9
8
12
11
10
9
8
REAL HOUSEHOLD EXPENDITURE
% of
GDP
% of
GDP
PAKISTAN*:
REAL GOVERNMENT EXPENDITURE
% of
GDP
% of
GDP
*NOTE: YEAR ENDS IN JUNE OF EACH YEAR; i,e, 2014 DENOTES JUNE 2014
CHART 6
Pakistani Economy Is Running On One Wheel:
Fiscal Spending
BCA Research 2014
The low potential growth rate has worsened
the countrys structural infation problem.
Chances are that Pakistan will now witness
high infation, even with relatively slower
growth.
F
Over the past several years, Pakistans
growth has been contingent on rampant
government expenditures (Chart 6). During
this period, the share of consumer spend-
ing has been unchanged while the share of
investment in GDP has plunged. In other
words, Pakistans already meager national
savings has been used to fund government consumption expenditures rather than corporate
investment in recent years.
The governments indulgence in fscal largesse has seen the budget defcit deteriorate from 2%
of GDP to over 8% before it improved to 6% recently due to the IMFs requirement for fscal
amelioration as part of the conditions for its bailout package (Chart 7).
280
260
240
220
200
180
160
140
120
100
1990 1995 2000 2005 2010 2015
280
260
240
220
200
180
160
140
120
100
PRODUCTIVITY*:
PAKSITAN
BANGLADESH
INDIA
VIETNAM
SRI LANKA
*SOURCE: THE CONFERENCE BOARD, TOTAL ECONOMY DATABASE,
JANUARY 2014
CHART 5
Pakistans Widening Productivity Gap
With Neighbors
BCA Research 2014
Falling
behind
BCA RESEARCH INC.
CHART 8
...Financed By Commercial Bank Deposits
And...
28
24
20
16
12
1990 1995 2000 2005 2010 2015
28
24
20
16
12
28
24
20
16
12
8
28
24
20
16
12
8
3200
1600
800
400
200
100
3200
1600
800
400
200
100
TOTAL BANK LOANS*
PRIVATE SECTOR CREDIT
% of
GDP
% of
GDP
BANK LOANS*
INVESTMENTS
PAKISTAN
FEDERAL GOVERNMENT DEBT HOLDERS:
DEPOSIT MONEY BANKS
INTERNATIONAL INSTITUTIONS
Bn
PKR
Bn
PKR
*COMMERCIAL PLUS SPECIALIZED BANKS
% of
GDP
% of
GDP
BCA Research 2014
Very
low
F
The ballooning defcit was fnanced with
bank deposits. As a result, banks invest-
ment portfolios have outgrown their loan
portfolios (Chart 8).
Fundamentally, public borrowing has
crowded out private investments. Bank
credit has fallen from 29% of GDP in 2008
to 17% currently. Credit to private sector
enterprises is down to a paltry 11% of GDP
(Chart 8, bottom panel).
In addition to borrowing from commercial
banks, the government has often tapped
the central bank as well the latter bought
massive amounts of government securi-
ties, a de facto monetizing of public debt
(Chart 9).
0
-2
-4
-6
-8
2002 2004 2006 2008 2010 2012 2014
0
-2
-4
-6
-8
PAKISTAN:
FEDERAL FISCAL BALANCE
CONSOLIDATED* FISCAL BALANCE
% of
GDP
% of
GDP
*CONSOLIDATED FISCAL AND PROVINCIAL
CHART 7
Pakistan:
A Decade Of Widening Fiscal Defcit...
BCA Research 2014
BCA RESEARCH INC.
CHART 10
Pakistan: Low Savings Suggest
Interest Rates Need To Rise
64
60
56
52
48
2000 2005 2010 2015
64
60
56
52
48
TERM DEPOSITS
AS A SHARE OF TOTAL BANK DEPOSITS
% %
Too
low
F
The outlook for fnancing budget defcits is dismal, as households have become far more inclined
to spend than to save. As Chart 10 shows, bank deposits have declined from 39% of GDP in
2008 to 34% now. Particularly hurt have been term deposits. This indicates that interest rates
are low and need to be raised in order to encourage savings.
F
In the real economy, symptoms of underinvestment are abundant. A lack of fnancing and proper
investment in the electricity sector has stymied growth and progress. Electricity generation has
been contracting for some time (Chart 11).
Other forms of infrastructure, such as the building of roads, have fared little better, barely keep-
ing up with the population growth (Chart 11, bottom panel).
F
Defcient infrastructure has increased the cost of business and eroded competitiveness. Indeed,
the World Economic Forums Global Competitiveness Index 2014ranks Pakistan 129
th
out of
144 countries down from 91 in 2007. The World Banks Ease of Doing Business index also
shows a similar drop, ranking Pakistan 110th out of 189 in its most recent report.
F
The consequence of scant capital investment and no expansion/advancement in productive
capacity is evident in Pakistans trade data. Even though Pakistan exports mostly low-tech
CHART 9
...Central Bank Debt
Monetization
3.0
2.5
2.0
1.5
1.0
.5
2004 2006 2008 2010 2012 2014
60
50
40
30
20
10
PAKISTAN CENTRAL BANK ASSETS:
GOVERNMENT SECURITIES* (LS)
AS A % OF TOTAL ASSETS (RS)
Tn
PKR
%
*GOVERNMENT SECURITIES HELD BY BANKING DEPARTMENT PLUS
ISSUE DEPARTMENT
BCA Research 2014 BCA Research 2014
BCA RESEARCH INC.
1.4
1.2
1.0
.8
.6
.4
2002 2004 2006 2008 2010 2012 2014
1.4
1.2
1.0
.8
.6
.4
1.4
1.2
1.0
.8
.6
1.4
1.2
1.0
.8
.6
RELATIVE EXPORT VOLUME*:
PAKISTAN vs BANGLADESH
RELATIVE EXPORT VOLUME:
PAKISTAN* vs EMERGING MARKETS**
PAKISTAN* vs WORLD**
*SOURCE: WORLD BANK
**SOURCE: NETHERLANDS BUREAU FOR ECONOMIC POLICY ANALYSIS
CHART 12
...And Competitiveness
BCA Research 2014
CHART 11
Deteriorating Basic Infrastructure...
1.0
.9
.8
.7
.6
.5
1990 1995 2000 2005 2010 2015
1.0
.9
.8
.7
.6
.5
15
10
5
0
-5
-10
15
10
5
0
-5
-10
LENGTH OF PAVED ROADS**
(PER 1000 PERSONS):
HIGHWAY
NON-HIGHWAY
Km Km
PAKISTAN:
TOTAL ELECTRICITY GENERATION*
Ann%
Chg
Ann%
Chg
*SOURCE: PAKISTAN BUREAU OF STATISTICS
**SOURCE: MINISTRY OF FINANCE
BCA Research 2014
Falling from
already low
level
Contracting
for 5 years
staple items (i.e. textiles and rice), which are less affected by the business cycle or changes
in technology, export volumes have actually stagnated. It is losing market share relative to its
neighbors like Bangladesh as well as other EM countries (Chart 12).
Bottom Line: Large fscal defcits and a crowding out of the private sector have led to a sub-optimal
economic structure and an infation-prone economy. Whats more, a lack of savings has constrained
capital investment. This, in turn, has endangered the economys productive capacity and eroded
competitiveness.
Cyclical Headwinds Ahead
The adjustment mechanism will likely come from rising interest rates. Defcient domestic savings
and even marginally diminishing foreign funding at a time of rampant government borrowing will
further push up local government bond yields.
BCA RESEARCH INC.
Notably, government domestic bond yields
have already been rising, even though infa-
tion remains muted. Besides, the central bank
has hiked interest rates a couple of times over
the past 12 months. Additional increases in
interest rates will further hinder credit and
money growth and depress economic activity
(Chart 13).
As a part of its program with Pakistan, the IMF
is forcing the government to reduce borrowing
from commercial banks. It is also pressing the
central bank not to monetize government debt
as well as sterilize all foreign exchange infows
(foreign loans, grants, and so on). In fact, the
IMF recently censored the central bank for not
doing so. Note that sterilizing all foreign ex-
change fows is negative for domestic liquidity
and growth as well as the stock market.
If and as the authorities act upon the IMF
recommendations in order to continue receiv-
ing multilateral funding, it will entail less
government borrowing/spending and, thus,
lower growth.
If the authorities do not abide by the IMFs
recommendations, they risk forfeiting further
funding. In this case, domestic borrowing costs
will likely go up markedly due to the savings
shortfall in the economy, and balance-of-
payment distress could lead to major currency
depreciation. In other words, the Pakistani
economy is poised to decelerate considerably over the medium term if the country does follow the
IMFs dictum, and could experience signifcant turbulence in its bond and currency markets if it
doesnt.
It is important to note that commercial banks are overstretched and have little room to buy more
government bonds without further reducing their lending to the private sector. Banks credit plus
investments (the latter is mostly holdings of government bonds) stand at 110% of deposits (Chart 14).
This means private sector lending can be kick-started only at the expense of government sector
CHART 13
Money Supply Is Slowing With
Rising Interest Rates
20
18
16
14
12
10
2006 2008 2010 2012 2014
4
3
2
1
0
1
2
3
4
25
20
15
10
5
10
11
12
13
14
M2 MONEY (LS)
REVERSE REPO RATE: 12-MONTH CHANGE
(INVERTED AND ADVANCED BY 6-MONTH; RS)
%
PAKISTAN:
M1 MONEY (LS)
GOVERNMENT LOCAL BOND YIELD
(INVERTED; RS)
Ann%
Chg
%
Ann%
Chg
-
-
-
-
BCA Research 2014
BCA RESEARCH INC.
lending (i.e. government borrowing costs will
rise). In fact, a slight reduction in banks
investments-to-deposit ratio over the past year
has already seen government bond yields soar
by about 300 basis points (Chart 14, bottom
panel). A rise in borrowing costs for the govern-
ment entails a rise in borrowing costs for all
borrowers, which will further depress growth.
Finally, commercial banks are saddled with
sizeable bad loans. As per the IMF, the non-
performing loan ratio now stands at 13%. Such
a high ratio can further reduce risk appetite
among bankers and prevent banks from expand-
ing their risk assets.
On the balance-of-payment front as well, funda-
mentals have barely improved. Since early this
year, the central banks foreign reserves have
spiked (Chart 15, top panel) as the balance of
payments has been funded by several one-off
infows: eurobond issuances ($2 billion), grants
from Saudi Arabia ($1.5 billion) and World
Bank and Asian Development Bank disburse-
ments ($1.6 billion). Even after these injec-
tions, Pakistans foreign reserves continue to
hover at a precarious level of $7 billion barely
covering two months of imports (Chart 15,
bottom panel).
Even before this, from 2011 to 2013, Paki-
stan funded its consumption and investment
by drawing down its foreign exchange reserves
(Chart 15, top panel).
As the effects of recent one-off foreign money injections wear off, the balance-of-payments position
will once again be jeopardized. In particular, Pakistans annual trade defcit totals about $17 billion.
The bulk of it is fnanced by remittances, bringing the annual current account defcit to about $4
billion. Annual net FDI is a mere $1.5 billion. The countrys capital account had plunged to as low
as $500 million before temporarily rising to $7 billion on recent grants and loans.
14
12
10
8
2004 2006 2008 2010 2012 2014
14
12
10
8
110
100
90
110
100
90
GOVERNMENT LOCAL BOND YIELDS:
10-YEAR
5-YEAR
% %
BANK CREDIT AND INVESTMENTS
AS A % OF DEPOSITS
% %
CHART 14
Pakistani Banks Are Overstretched:
Too Much Government Debt Holding
Up 300bps
in one year
High
BCA Research 2014
BCA RESEARCH INC.
CHART 16
Manufacturing Is Slowing
Along With Money Supply
BCA Research 2014
20
15
10
5
1998 2000 2002 2004 2006 2008 2010 2012 2014
20
15
10
5
20
15
10
5
0
-5
-10
20
18
16
14
12
10
8
6
4
BANK DEPOSITS
M2 MONEY SUPPLY**
Ann%
Chg
Ann%
Chg
MANUFACTURING QUANTUM INDEX* (LS)
M2 MONEY SUPPLY** (RS)
Ann%
Chg
Ann%
Chg
*SHOWN AS A 6-MONTH MOVING AVERAGE
**SHOWN AS A 3-MONTH MOVING AVERAGE
While further assistance from foreign countries (Gulf countries for example) is possible, it is unlikely
to be imminent. Pakistans foreign exchange reserves will likely have to fall back to perilous levels
again before donor countries step in. Domestic political uncertainty may also need to subside before
foreign donors/creditors grant new funds.
Bottom Line: Domestic liquidity/savings dynamics will deteriorate without substantial multilateral
and bilateral foreign funding. The lack of foreign savings/capital will push up domestic interest
rates (government bond yields) and weigh on growth. Meanwhile, manufacturing is already slowing,
tracking broad money downward (Chart 16).
CHART 15
Pakistan:
Foreign Reserves Remain Perilously Low
BCA Research 2014
8
6
4
2
2004 2006 2008 2010 2012 2014
8
6
4
2
16
14
12
10
8
6
4
2
16
14
12
10
8
6
4
2
IMPORT COVERAGE OF FOREIGN
RESERVES (INCLUDING GOLD)
Mths Mths
PAKISTAN:
TOTAL FOREIGN RESERVES AT CENTRAL BANK
EXCLUDING GOLD
Bn
US$
Bn
US$
Dangerously
low
BCA RESEARCH INC.
BCA Research 2014
CHART 17
Provincial Government Shares In
Federal Revenues Have Jumped
6.0
5.5
5.0
4.5
4.0
2006 2008 2010 2012 2014
11
10
9
8
7
FEDERAL GOVERNMENT FISCAL ACCOUNTS:
TRANSFERED TO PROVINCES (LS)
NET RECEIPTS (RS)
% of
GDP
% of
GDP
NOTES: ALL SERIES SHOWN AS A 4-QUARTER MOVING AVERAGE
Socio-Political Dynamics Remain
Complicated
One of the main reasons behind the rally in
Pakistani stocks along with foreign lending
and grants to Pakistan has been last years
rather peaceful parliamentary elections and
subsequent transition of power from one demo-
cratically elected government to another the
frst such instance in the countrys history.
Moreover, the newly elected government was
thought to have enough political capital to push
through much needed yet painful structural
reforms.
More than a year later, however, there has been
little if any headway in pursuing structural re-
forms. Instead, allegations of corruption and
electoral malpractice have rocked the nation,
with violent street protests. At the same time,
there is no political solution to deal with the
problem of religious extremism and terrorism.
All these problems have weakened the govern-
ments mandate, and it has become ever more dependent on the military establishment to maintain
law and order.
Furthermore, Pakistans new constitutional arrangement of sharing government revenues between
federal and provincial governments has further diluted the federal governments authority and ca-
pacity to push through reforms:
F
As per a new constitutional provision, the federal government is now obligated to transfer the
bulk of its revenues to the provinces (Chart 17). It is now up to the provinces to decide what
to spend the money on.
F
The provinces own source of revenues is very small, at about 0.5% of GDP. Yet they will get
to spend a much larger chunk of fscal expenditures. This has created a confict of priorities
between the federal and provincial governments, and will likely hamper any concerted effort to
rein in the governments current expenditures and pivot toward developmental expenditures.
The matter is further complicated as the ruling PML-N party in center holds power in only one
of the four provinces.
Overall, expectations for possible structural reforms to bring the economy back on track seem distant.
The euphoria over the democratic transition that helped share prices surge is experiencing a setback.
BCA RESEARCH INC.
BCA Research 2014
CHART 18
Pakistani Stocks Are Not Cheap
20
15
10
5
2002 2004 2006 2008 2010 2012 2014
20
15
10
5
6
5
4
3
2
1
6
5
4
3
2
1
TRAILING P/E*:
PAKISTAN OVERALL
FINANCIAL STOCKS
PRICE/BOOK VALUE*:
PAKISTAN OVERALL
FINANCIAL STOCKS
*SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
In its June 19, 2013 Special Report,
1
our Geo-
political Strategy service noted that geopoliti-
cally speaking, Pakistan is in a sweet spot.
It is one of the few countries in the world that
stands to beneft from global multi-polarity, as
Islamabads stability is critical for global se-
curity. As such, Pakistan has to a large extent
managed to leverage its near-failed state status
for diplomatic and economic support that has
in turn boosted the local bourse. However,
our Geopolitical Strategy team recently closed
their speculative long Pakistani stocks position
(with a 28% gain) due to mounting domestic
instability.
2
Overall, a key risk to our negative view is im-
minent foreign grants and loans that could
preclude the adjustment that we discussed the
previous section.
Investment Conclusion
Pakistani stocks' valuations are neutral, with
the price-to-book value ratio at 2.4 and the
trailing P/E ratio at 10 (Chart 18). However,
the risk-reward is very unattractive because:
F
The more recent part of the rally over the
last two years was spearheaded by bank
stocks, which account for 35% of the MSCI
Pakistan index. The bank equity rally may
fade soon. As per the IMF, banks exposure
to the public sector over the past two years
has gone up from 30% of total assets to 46%. Banks are now holding around 76% of outstand-
ing government securities, 83% of which is held as Available for Sale. These securities are
subject to revaluation risks.
As government bond yields rise, banks will suffer losses on their massive holdings of government
bonds, and their share prices will drop.
1
Please see BCA Geopolitical Strategy Special Report, "Sweet Spot", dated June 19, 2013, available at gps.bcaresearch.com
2
Please see BCA Geopolitical Strategy Monthly Report, "Lions, And Tigers, And Bears...Oh My!", dated August 13, 2014, available at
gps.bcaresearch.com
BCA RESEARCH INC.
F
The rupee is expensive, based on the real
effective exchange rate (Chart 19). It could
depreciate considerably as balance-of-
payment dynamics worsen. This heightens
the risk for foreign investors.
F
Finally, sovereign spreads will likely widen,
given the outlook for higher domestic in-
terest rates, weaker growth and currency
depreciation.
Bottom Line: Investors should steer clear of
Pakistani stocks.
Rajeeb Pramanik, Associate Editor
rajeebp@bcaresearch.com
BCA Research 2014
CHART 19
Pakistani Rupee Is Expensive
140
120
100
1990 1995 2000 2005 2010 2015
140
120
100
PAKISTANI RUPEE:
REAL EFFECTIVE EXCHANGE RATE*
*SOURCE: J.P. MORGAN CHASE & CO.
Expensive
BCA RESEARCH INC.
N
E
U
T
R
A
L
POSITIONS
INITIATION
DATE
RETURN
ON EM EQUITY BENCHMARK
SHORT EM/LONG U.S. STOCKS DEC 14/10 41.60%
SHORT EM STOCKS MAY 24/11 6.10%
TAIWAN AUG 9/07 6.20%
KOREA IT SECTOR JAN 27/10 49.90%
SINGAPORE AUG 24/10 6.20%
POLAND JAN 25/11 -9.80%
MALAYSIA JUN 14/11 14.60%
CZECH REPUBLIC JAN 22/13 -31.10%
CHILE JAN 22/13 -33.10%
CHINA CONSUMER STOCKS JAN 22/13 -6.10%
MEXICO SEP 25/13 3.30%
SOUTH AFRICA May-06 -3.10%
THAILAND OCT 30/09 -42.90%
INDONESIA JUN 14/11 0%
TURKEY MAR 13/12 -7.70%
KOREA (EXCLUDING IT AND BANKS) APR 3/12 -2.70%
BRAZIL AUG 21/12 20.50%
COLOMBIA APR 16/14 13.60%
HONG KONG - DOMESTIC STOCKS MAR 30/10
PHILIPPINES APR 3/12
RUSSIA OCT 12/10
HUNGARY MAY 7/14
INDIA AUG 21/13
PERU JAN 15/14

Equity Recommendations
O
V
E
R
W
E
I
G
H
T
U
N
D
E
R
W
E
I
G
H
T
NOTE: RETURNS RELATIVE TO BENCHMARK. MSCI WORLD FOR EQUITY RECOMMENDATIONS UNLESS OTHERWISE SPECIFIED.
* RETURN INCLUDES THAT OF OUR PREVIOUS CALL: LONG KOREA / SHORT EM BANKS FROM APR 3/12 TILL FEB 19/13.
OTHER EQUITY RECOMMENDATIONS - ABSOLUTE TRADES
SHORT BRAZILIAN BANKS APR 26/11 20.60%
LONG EM EQUITY VOLATILITY (ETF: VXEEM) MAR 6/12 -28.20%
LONG BANGLADESH STOCKS APR 9/13 56%
SHORT SOUTH AFRICAN CONSUMER STOCKS APR 23/13 11%
SHORT TURKISH STOCKS JUN 4/13 26.18%
SHORT KOREAN AUTO STOCKS JUL 3/13 -16.20%
LONG SRI LANKAN STOCKS APR 2/14 9.80%
LONG EGYPTIAN STOCKS AUG 20/14 5.80%

OTHER EQUITY RECOMMENDATIONS - RELATIVE TRADES
LONG EM IT / SHORT EM MATERIALS FEB 23/10 83.90%
LONG SINGAPORE / SHORT HONG KONG STOCKS AUG 24/10 -14.80%
SHORT CHINESE BANKS / LONG CONSUMER
DISCRETIONARY AND TAPLES
FEB 15/11 1.10%
LONG EM ENERGY / SHORT EM MATERIALS NOV 1/11 16.20%
SHORT CHINESE PROPERTY COMPANIES / LONG
U.S. HOMEBUILDERS
MAR 06/12 67.10%
SHORT EM BANKS / LONG U.S. BANKS FEB 12/13 39.20%
LONG KOREAN / SHORT INDONESIAN BANKS* FEB 19/13 14.20%
LONG VIETNAM STOCKS / SHORT EMERGING
MARKETS
MAY 14/13 11.30%
LONG CHINESE SMALL CAPS / SHORT EM SMALL
CAPS
NOV 20/13 -1%
LONG GULF STOCKS / SHORT EMERGING MARKETS DEC 18/13 19.80%
LONG INDIAN / SHORT INDONESIAN STOCKS JUL 30/14 4%
LONG BRAZILIAN LARGE CAP /
SHORT SMALL CAP STOCKS
SEP 10/14 -0.10%
BCA RESEARCH INC.
POSITIONS
INCEPTION
LEVEL
INITIATION
DATE
RETURN
TO DATE
STOPS
FIXED-INCOME
RECEIVE POLISH 5-YEAR SWAP RATES 5.02% APR 30/09 258 BPs
RECEIVE KOREAN 5-YEAR SWAP RATES 3.96% MAY 24/11 134 BPs
RECEIVE TURKISH 10-YEAR/PAY 1-YEAR SWAP RATES
0.47% NOV 8/11 -61 BPs
SHORT 5-YEAR INDONESIAN BONDS 5.22% MAR 20/12 19%
RECEIVE 3-YEAR CHILEAN SWAP RATES 5.68% APR 3/12 217 BPs
RECEIVE MEXICAN 5-YEAR SWAP RATES 7.49% MAY 28/13 -30 BPs
RECEIVE COLOMBIAN 5-YEAR SWAP RATES 4.99% OCT 9/13 -22 BPs
RECEIVE PHILIPPINES 5-YEAR SWAP RATES 3.15% NOV 6/13 25 BPs
RECEIVE BRAZILIAN 5-YEAR / 1-YEAR PAY SWAP RATES 1.66% MAR 19/14 155 BPs
LONG 1-YEAR EGYPTIAN TREASURY BILLS 12.14% AUG 20/14 1%
LONG 10-YEAR BRAZILIAN BONDS, CURRENCY HEDGED 11.76% SEP 10/14 -0.50%
CREDIT MARKETS
SHORT EM CORPORATE AND SOVEREIGN CREDIT/
LONG U.S. JUNK CORPORATE CREDIT
AUG 30/11 10%
LONG RUSSIA/SHORT VENEZUELA SOVEREIGN CREDIT SEP 4/09 -23.80%
LONG 5-YEAR CHINESE CDS
77 BPS JUN 7/11 -7 BPs
SHORT ARGENTINE GDP-LINKED WARRANTS OCT 11/11
SHORT SOUTH AFRICAN / LONG EM SOVEREIGN CREDIT APR 10/12 3.20%
SHORT BRAZILIAN / LONG EM SOVEREIGN CREDIT MAY 15/12 9%
LONG MALAYSIA / SHORT COLOMBIA SOVEREIGN CREDIT OCT 16/12 4%
SHORT INDONESIA / LONG MEXICO SOVEREIGN CREDIT NOV 28/12 0.60%
LONG PHILIPPINES / SHORT TURKEY SOVEREIGN CREDIT JUN 4/13 2%
LONG PERU / SHORT BRAZIL SOVEREIGN CREDIT AUG 21/13 2.60%
LONG EGYPT / SHORT EM SOVEREIGN BONDS AUG 20/14 0.80%
CURRENCIES
SHORT BRL / LONG USD 1.66 SEP 6/11 14%
LONG PHP / SHORT AUD 0.02251 SEP 13/11 0.40%
SHORT IDR / LONG PHP 203.9 OCT 18/11 21.80%
SHORT PLN / LONG USD 3.28 NOV 15/11 -10.40%
SHORT TRY / LONG USD 1.845 JAN 17/11 12.20%
SHORT IDR / LONG USD 9155 MAR 20/12 16.80%
SHORT UAH (6-MONTH NDF) / LONG USD 9.115 JUL 17/12 15.15%
SHORT CLP / LONG USD 478.9 NOV 6/12 16.90%
SHORT THB / LONG JPY 30.05 APR 30/13 -3.10%
LONG MXN / SHORT COP 143.2 OCT 09/13 3.80%
SHORT HUF / LONG EUR 294.0 OCT 1613 3.90%
SHORT ARS (6-MONTH NDF) LONG USD 9.35 MAY 14/14 10.50%
LONG MYR / SHORT THB 10.06 JUN 25/14 -0.60%
SHORT ZAR / LONG USD 10.51 JUL 23/14 3.50%
SHORT RUB / LONG USD 35.04 JUL 23/14 6.10%
SHORT KRW / LONG USD 1024.25 SEP 10/14 -0.13%
NOTE: PLEASE NOTE THAT ALL CURRENCY TRADE CALCULATIONS INCLUDE COST OF CARRY.
Fixed-Income, Credit And Currency Recommendations
BCA RESEARCH INC.
Archive Of Previous Reports
Please click on the links below to view reports:
Thematic Chartpacks (click on the links to access reports):
1. Brazil's Election: Separating Signal From The Noise - September 10, 2014
2. Country Perspectives: Korea, The Philippines And Turkey - September 10, 2014
3. The Scramble For Africa: Investment Implications - September 3, 2014
4. EM Proftability And Risk To Our View - September 3, 2014
5. Colombia's Oil Boom: Tapped Out - August 27, 2014
6. Unprecedented Divergence - August 27, 2014
7. Egypt: Stabiity = Opportunity - August 20, 2014
8. Making Sense Of The EMS Rally - August 20, 2014
9. Dissecting Chinese Imports And Their Global Impact, August 13, 2014
10. EM Stocks And U.S. Dollar: Concurrent Breakout? - August 6, 2014
11. Reasons Not To Chase The Latest EM Rally - July 30, 2014
12. Long Indian / Short Indonesia Stocks - July 30, 2014
13. Monitoring China's Credit Cycle - July 23, 2014
14. Business Cycle Conditions In Emerging Markets - July 16, 2014
15. EM Rally: As Good As It Gets? - July 9, 2014
16. Chilean Stocks: Disentangling The Earnings Puzzle - July 2, 2014
17. On EM Equity Risk Premium And Valuations - June 25, 2014
18. EM Rebound: Signs Of Exhaustion? - June 18, 2014
19. China's Real Estate Blues - June 11, 2014
20. EM Reality Check - June 4, 2014
1. Equity Technical Indicator
2. Emerging Market Credit Spreads: Sovereign And Corporate
3. Emerging Markets Currencies: Valuation & Technical
4. Emerging Markets Equity Sectors
5. Emerging Markets Equity Valuations
6. Emerging Markets Small Caps
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