ALI FARID KHWAJA
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By SHABBIR H. KAZMI

Mar 28 - Apr 03, 2005
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ALI FARID KHWAJA is currently working as an Economist at Alfalah Securities. He is a regular writer for newspapers, business magazine and international journals. Prior to joining Alfalah, Ali worked at AKD Securities and held research position at LUMS. He has been selected as the Best Young Economist of Pakistan by the Higher Education Commission and has represented Pakistan at international conferences in Cairo, Ankara, Copenhagen, Delhi, Lahore and Lindau (Germany). He has won various international awards and recognition on his economic research. Ali is a Rhodes Scholar for 2005 from Pakistan. He intends to set up an independent market and economic research consultancy, which would ensure that there are no vested interests affecting research and that the investors get timely access to relevant data and research.

KEEPING IN VIEW THE ECONOMIC FUNDAMENTALS, WHAT IS THE OUTLOOK FOR LISTED COMPANIES?

The economic outlook is pretty positive. The figures for the first six months released by the SBP and FBS all point to another robust growth this year. However, I am alarmed by the rise in inflation. There are signals of a mild bubble buildup in the asset market and recently in the capital market, which warrants intervention by the government. However, on a whole, the macroeconomic environment seems favorable and the results should trickle down into healthy corporate earnings. Long-run growth, however, depends critically on how the domestic politics move in the coming months.

THERE ARE EXPECTATIONS OF A BUMPER COTTON CROP AND TEXTILE QUOTA REGIME ALSO DOES NOT EXIST. WHAT COULD BE THE IMPACT ON EARNINGS?

I have done considerable research on the impact of trade liberalization on the textile sector of Pakistan. The results of my empirical studies concur with the findings of Will Martin (World Bank) that in the short-run there would be structural adjustments in the sector, which would hurt the profitability. However, in the long-run the spinning and composite sectors would be major gainers from the opening up of quota-constrained markets. I would be bullish on the spinning sector especially in those companies which have, over the last few years, carried out BMR and technological up gradation. However, as an economist, I am concerned about the unemployment, which would be created by substitution of labour, by more capital machinery.

THERE HAS BEEN AN UPWARD SURGE IN PRICES. IS THE DIVIDEND STILL ATTRACTIVE?

 

 

I see inflation as a major dampener on growth. I have frequently written on the subject and I reiterate that inflation can erode the growth momentum by increasing political uncertainty and increasing the cost of doing business. Already the business would be getting a double hit due to the rising interest rates. At present, the corporations are achieving returns of around 20%, interest rates and inflation do not seem big threats, however, the SBP has to be vigilant enough to lower the interest rates once the growth in economy seems to taper off.

KEEPING IN VIEW THE GROWING DEMAND FOR CEMENT, CAN THE SHAREHOLDERS EXPECT GOOD PAYOUT BY THE COMPANIES?

Currently, I think the cement sector would continue to benefit due to the sky-high demand as construction activities pick-up. However, the sector's profitability is under threat due to the planned capacity expansions by some companies. Honestly speaking, as an economist, I am not concerned about the margins of the cement sector. I am more worried about the illegal cement cartel. I think the regulator (the Monopoly Control Authority) has to take the political difficult steps of stamping down on the cartel so that the prices could be brought down to natural levels.

WHAT IS THE OUTLOOK FOR BANKING SECTOR AND HOW THE BANKS ARE GOING TO MEET THE ENHANCED PAID-UP CAPITAL REQUIREMENT?

I think the banking sector is ideally poised to benefit from the current economic cycle. The economic growth is being driven by export growth and boom in domestic demand, both of which would lead to higher earnings of the banking sector. However, when choosing a banking stock, I would look at its credit quality and interest risk sensitivity gap, factors which other market analysts seem to be ignoring. My preferred pick in the banking sector would be Bank Alfalah, Soneri, and Askari Commercial Bank.

LATELY, TELECOMMUNICATION SECTOR HAS ATTRACTED THE LARGEST SHARE OF FDI. WILL THE TREND CONTINUE?

The services sector is all set for high growth. Globally, the oil and gas sector and telecommunications are emerging as magnets for attracting FDI. Pakistan's high population density makes it an ideal market for telecommunication companies. I am also optimistic about the potential efficiency gains from the privatization of PTCL. The state-run agencies lack a work culture and ethics and it is this mentality or lack of work-conducive environment, which is their main weakness. I think that privatization would lead to competition for performance within the companies and would lead to higher efficiency gains. The banking sector is a clear example of how privatization can revolutionize a sector. Post privatization of the lethargic banking sector transformed into lean, mean profit making machine. I see similar happening in the telecommunication sector. After all, competition is the biggest driving force for the market.

THERE HAS BEEN AN UPWARD SURGE IN PRICES. IS THE DIVIDEND STILL ATTRACTIVE?

I think the SECP has to play a more vigilant and perhaps strict role in regulating the market. Unfortunately, the truth is that market manipulations are a norm in the capital market. The recent measures taken by the SECP like introduction of a unique client ID and the proposed demutualization of the bourses are certain steps in the right direction. The market watchdog has to show some steel to ensure that the retail investors, which have jumped in the market due to government's privatization drive, remain safe from manipulations.