Emerging market for investors

AFRICA could be the next big emerging market for investors but not solely because of its rich resources. The African consumer will also be an important catalyst. Many analysts argue that Africa’s rich exposure to resources is purely “extractive” and the money made does not trickle down to the continent’s domestic consumers. At the same time, there are concerns that a downturn in China’s property market will curb Chinese demand for African resources. Sub-Saharan African economic growth is actually being driven by domestic factors, and not just foreign mining companies extracting African minerals.

Since 2000, the service and manufacturing sectors have regained the momentum lost during the 1980s and 1990s, which were two lost decades for Africa.

Most SSA countries are facing substantial fiscal deficits and the effort of financing these deficits is likely to pose obstacles to the region in 2011. However, the unfreezing of international capital markets will provide some relief. Countries that had postponed their Eurobond issuances in 2010 are scheduled to tap into the international debt markets in 2011. A positive response to Nigeria’s January 2011 Eurobond issuance may encourage a second issuance from Ghana, as well as bring Kenya’s plans for an initial offering to fruition. Tighter global credit conditions from bouts of risk aversion could reduce funds needed to maintain the pipeline of projects. Some SSA countries are raising funds at home in local debt, reducing exchange rate risk and the need to go to international creditors. The shallowness of frontier markets will impair access to credit, with the saving grace that the less open markets of the region have been less affected by global selloffs.

Over the next several years, substantial growth is expected in the domestic sectors of Sub-Saharan economies. In most of sub-Saharan Africa, there’s a high level of entrepreneurial energy, and basic infrastructure in terms of communications and banking is now in place. The majority of frontier Africa investors tend to target the region’s evolving consumer middle class that is expected to increase its spending from $860-billion in 2008 to $1.4-trillion in 2020. The US-based behemoth last year bid $2.3billion to acquire 51% of South Africa’s Massmart, a deal expected to be approved by local regulators shortly. The buy will instantly make WalMart the third biggest retailer in South Africa and give it a toehold in 13 other sub-Saharan African countries.

South Africa is in a relatively strong economic position. The economy has been recovering at a fairly modest pace Strong commodity prices, low interest rates and faster global growth have been the main forces behind the economic recovery. GDP growth was projected at 3.4% this year, rising to 4.1% in 2012 and 4.4% in 2013, after the economy shrunk by 1.7 per cent in 2009. Consumer inflation is expected to come in at around 5.3 this year, down from 8.9 per cent in 2008. The country’s unemployment rate dropped slightly in the final quarter of 2010, from 25.3 in last year’s third quarter to 24 per cent – 2.2 percentage points higher than at the end of 2008.

While consumer inflation is rising, it remains well within the Reserve Bank’s 3—6 per cent target band. In the first half of 2011, consumer inflation is expected to remain well contained while price pressures are set to build in the second half, with CPI expected to end 2011 just below the six percent mark, giving a CPI average for 2011 of 4.7 per cent.. In 2012, CPI is forecast to average 5.7. The adverse consequences of the higher oil price have already been felt – the local petrol price has increased by 92c/litre since September 2010, with another hefty rise of around 30c/litre on the cards for March. Food price pressure is set to build through 2011.

World commodities

Gold

IN the New York market gold rallied above $1,500 an ounce for the first time on April 21, extending the week’s record run as investors hedged growing inflation risks and bought into a broad commodities rally as the dollar slumped.

Mounting evidence of quickening inflation in major Asian economies such as China and India were echoed in Latin America on the day, with Brazilian prices nearing a government ceiling and Mexico’s yearly rate exceeding a key target.

The break-even rates on US Treasury Inflation-Protected Securities (TIPS), which measures investors’ inflation expectations, rose for a second day.

Deep losses for the dollar and rallies in oil and grain markets that fueled further inflation concerns also buoyed bullion, which once again rose in tandem with riskier assets like equities as investors turned to gold as a store of value. Gold prices tend to rise with a declining dollar.

Spot gold rose to an all-time high of $1,505.70 an ounce. It was last up 0.4 per cent at $1,500.50 having risen almost four per cent over the past eight days. The metal is set for its 11th successive quarterly gain.

While well below their inflation adjusted highs of more than $2,200 struck in 1980 – when bullion prices spiked in response to the Soviet invasion of Afghanistan – gold has doubled since the lows of 2008 and risen six-fold since 2001.

Silver also surged above $45 for the first time since 1980, when the Hunt Brothers of Texas cornered the silver market.
Signs of simmering inflation across the world underpin gold. The break-even rates on the expected new five-year US. TIPS rose for a second day to 2.36 per cent, roughly one basis point higher than late April 21.

In Brazil, annual inflation sped dangerously near a government ceiling in the month to mid-April, while Mexico yearly inflation rate climbed above policymakers’ target rate of three per cent as investors prepare for higher borrowing costs early next year.

Gold buying in the Asian countries is being fueled by rising consumer incomes and higher inflation. Both China and India reported higher than expected inflation a fortnight back.

While gold investors in western markets have been motivated chiefly by risk aversion in recent years, the precious metal is a much more deeply established asset in Asia, being bought in the form of bullion bars and coins. India and China are by far the world’s biggest bullion consumers.

In the Singapore market, bullion powered to a lifetime high on April 21 on a sharply weaker dollar, while lingering tensions in the Arab world, worries about the euro zone crisis and the US. fiscal health offered additional support.
Silver roared to its highest in more than three decades as it tracked a rally in gold, which was also spurred by a threat of a downgrade to the United States triple-A credit rating. The gold-silver ratio – the number of silver ounces needed to buy an ounce of gold – was at its lowest since 1983.

In the New York market, spot gold rose to a record high of $1,508 an ounce up $7.71 an ounce. The US gold futures also hit a lifetime high at $1,508.9 an ounce. A bullish target at $1,518 per ounce remains intact for spot gold.

The dollar tumbled to its lowest in three years against a basket of currencies as the prospect that the US interest rates would remain at record lows prompted investors to flock back to higher-yielding currencies.

In the London market, gold prices hit fresh highs on April 21 and silver rallied to its strongest since 1980 as the dollar slid to a three year low against a basket of major currencies. Spot gold was bid at $1502.10 an ounce, having earlier peaked at $1508 ounce. The US gold futures for June delivery rose $3.90 an ounce at $1502.80. Silver was bid at $45.71 an ounce against $45.10.

A tightening of the US monetary policy and eventual rise in interest rates are still viewed as the biggest risk factors for gold, which as a non-interest bearing asset has a lower opportunity cost when rates are depressed. But for the moment the precious metal is proving resilient above $1,500 an ounce.

On the supply side of the market, African Barrick

Gold said its output fell 2 per cent year-on-year in the first quarter, but said it was on track to meet its full-year production target.

Oil

OIL advanced for a third day on April 21 in New York as signs of an improving economy in the US, the world’s biggest crude-consuming nation, stoked speculation demand for fuel may increase.

Futures for June delivery climbed as much as 0.9 per cent, extending previous day’s 2.9 per cent gain, as Asia’s equities benchmark climbed to a six week high after Apple Inc.’s profit beat projections. Prices also rose after the Energy Department reported an unexpected drop in crude supplies.

Crude oil for June delivery gained as much as 95 cents to $112.40 a barrel, in electronic trading on the New York Mercantile Exchange. It was at $111.98 in Singapore. On April 21, the contract climbed $3.17 to $111.45, the highest since April 8. Prices are up 34 per cent the past year.

Brent crude oil for June settlement advanced 35 cents, or 0.3 per cent, to $124.20 a barrel. It rose $2.52, or 2.1 per cent, to end the session at $123.85 a barrel on the London-based ICE Futures Europe exchange on April 21, the highest settlement since April 11.

The US crude oil supplies fell 2.32 million barrels to 357 million a fortnight back, the first drop since February, the Energy Department said in a weekly report. Inventories were forecast to increase by 1.3 million barrels, according to the median of 13 analyst estimates in a Bloomberg News survey.

Gasoline stockpiles dropped 1.58 million barrels to 208.1 million, the lowest level since the week ended November 12, the report showed. Stockpiles were forecast to decline by 1.75 million barrels, according to the survey.

Oil has advanced 22 per cent in New York this year. Unrest in the Middle East and North Africa has toppled leaders in Egypt and Tunisia and spread to Libya, Algeria, Bahrain, Iran, Oman, Syria and Yemen. Libyan crude output, which averaged 1.6million barrels a day last year, fell to 390,000 barrels a day in March, according to a Bloomberg News survey.

According to technical charts. Brent oil is expected to revisit the April 11 high at $127.02 per barrel, while the US oil could hit $113.46 a barrel as the long-term uptrend for these two benchmarks have resumed, said Reuters market analyst.

Brent hit a 32-month high above $127 a barrel on April 11, but concerns about high prices stifling world fuel demand has cut gains since then.

High oil prices have hurt demand in top consumers China and the United states, and Opec needs to raise output around June to stem further price rises.

Copper

IN recent days, copper has risen to new highs. On April 21 it rallied to its highest in more than a week in the London market, as supply concerns and a weak dollar lifted prices, while investors shrugged off data showing a large drop in Chinese imports of the metal last month.

Benchmark copper on the London Metal Exchange finished at $9,700 a tonne versus $9,577 at the close on April 20.
The red metal, used in power and construction, earlier hit $9,707.75 a tonne, its highest since April 12, after having recovered from one-month lows near $9,200 at the start of the week.

Anglo American said floods and heavy rains hampered output in the first quarter, including a 14 per cent fall in copper output, reinforcing worries about tight supply, although the London-listed miner stuck to its production targets.

China’s refined copper imports dropped 43 per cent in March from the same month last year due to high stocks and strong international prices, although the figure was a rebound from the holiday-shortened month of February.

Inventories of copper in LME-registered warehouses rose by 2,575 tonnes to 456,275 tonnes, their highest since last June, the latest data showed.

Aluminium powered to its highest level since August 2008 as rising costs of power boosted expectations for the energy-intensive metal’s input costs. Aluminium, which is used in transport, packaging and construction, has been lifted by rising power prices, which account for about 35 per cent of aluminium smelting costs. China accounted for around two-thirds of global aluminium output last year

Corporates unwillingness to access equity market

WHILE the sponsors’ desire to mobilise capital from the stock market is at depressingly low ebb, there is an insatiable appetite of investors for new equity offerings.
The point was proved by the Initial Public Offering of International Steel Limited (ISL) which hit the stock
market on April 12. The floatation was over subscribed by 30 per cent on the first day of the three days at the ‘book building’ stage.
Analysts said the ISL was the first company to enter the equity market with an IPO after a gap of 12 months.
The State Bank of Pakistan reported on Wednesday that the private sector total borrowings from scheduled banks amounted to Rs177 billion. Corporates prefer to raise money at exorbitant interest rates from banks rather than tap the capital market for cheaper funds. The last five years saw an average of less than eight floatations a year.
The disenchantment of private companies to go public, considering that Pakistan equities have offered exciting return of 28 per cent last year, seems mind-boggling. But many market participants see “a method in this madness”.
One of the major reasons pointed out by the broker community for lackadaisical interest of sponsors to enter the stock market is the absence of the tax incentives for listed companies and the stringent requirements of corporate governance.
Up until June 2002, there was a difference of 10 per cent in rate of income tax paid by the listed and unlisted companies with the latter having to pay at 45 against 35 per cent for listed companies.
That difference was gradually eroded and now both are taxed at the same rate of 35 per cent.
The number of registered companies has increased by leaps and bounds in the last few years. “The Securities and Exchange Commission of Pakistan (SECP) proudly presents its accomplishment by declaring every month the new companies the regulator registered, (3,151 in 2010) which has now pushed the total corporate portfolio to 58,443”, said a stock broker.
“The transformation from ‘seth culture’ in running businesses to more open registered firms bodes well for the country”, says a third generation Oxford-educated child of one of the famous 22 families of the 1960’s. The story is nonetheless, half as glossy.
The penchant to keep control of corporates by individuals persists.
Public shareholders are still considered to be all but nuisance. Most registered companies comprise private companies, single member companies and public unlisted companies. The number of publicly listed companies on the stock exchange has scarcely managed to escalate.
At the moment, just about 638 companies are quoted on the Karachi  Stock Exchange with listed capital of Rs924 billion. And even so, out of those listed entities more than 100 are lame ducks sitting on the ‘defaulters’ counter’.
In another 200 companies no trading takes place as almost all of the shares are held by sponsors in large frozen blocks. “Of what use are they to the small investors, though for the benefit of the exchange, they do add to the total market
capitalisation that the bourse is able to display?”, said an investor.
Incidentally, entities in one of the most affluent and high-growth sector: the cellular companies have opted to stay out of the public offer of equity. And that raises the question: Should wealthy companies earning enormous profits be forced to seek listing?
The shrinking IPO market, in spite of phenomenal growth in registered companies should be of concern to the government. Stock traders say that the government must take the lead in offerings of just a part from its almost wholly-owned giant companies.
The enormous gains that investors made from subscriptions in IPOs of state-owned companies, such as the Oil & Gas Development Company Limited (OGDC) and Pakistan Petroleum (PPL), brought them in droves to the capital markets, many years ago. Some estimates suggested that from less than 100,000, the number of investors in equities rose to 500,000. But that was until the stock market crash of 2008.
Both the needy and greedy small investors lost all that they had earned and more. The public sector offerings are not be seen even at a distant future and private sector listings are all, but slow.
The result is that too much cash is chasing too few shares at the market.
On any given day, volumes are almost always generated in as many shares as can be counted on the finger tips of one hand.
The government is at present stingily holding on to all its shares in public companies. None of those promises of
divestment of holdings in State Life Insurance and secon-dary offerings in the OGDC, the NBP and the UBL materialised.
The State Bank of Pakistan reported on Wednesday that government borrowings from scheduled banks had mounted to Rs317 billion during the first nine months of the ongoing fiscal year.
The current bull market presents the opportunity to the government to offer equities from its healthy state-controlled companies at heavy premium and lessen its burden of borrowings from banks.