why not invest in pakistan

Faisal Hasan KAMCO ASSET MANAGEMENT 715011

special reportavoid pakistani stocks

September 17, 2014

[email protected] • TEL 514.499.9550 • www.bcaresearch.com Copyright © 2014 BCA Research Inc. All Rights Reserved. Refer to last page. 1

Editorial BoardArthur 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 economy’s 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?

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40

1995 2000 2005 2010 2015

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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.

Pakistani 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 fiscal largesse, foreign sovereign support and euphoria over the country’s first-ever democratic transition of government. Meanwhile, there has hardly been any discernible improvement in the economy’s 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


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2000 2005 2010 2015

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GROSS DOMESTIC SAVINGS PLUSOVERSEAS WORKERS' REMITTANCES:

PAKISTANBANGLADESHSRI LANKA

% ofGDP

% ofGDP

GROSS DOMESTIC SAVINGS*:PAKISTANBANGLADESHSRI LANKA

% ofGDP

% ofGDP

*SOURCE: WORLD BANK

CHART 2

Pakistan's Savings Rate Is Very Low


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 everEven 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 figure 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 nation’s meager savings rate has con-tinued to severely restrain capital invest-ment. At barely 13% of GDP, the country’s 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).

Deficient 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.




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1985 1990 1995 2000 2005 2010 2015

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PRODUCTIVITY GROWTH**LABOR FORCE**

Ann%Chg

Ann%Chg

PAKISTANGDP GROWTH RATE*:

REALPOTENTIAL

Ann%Chg

Ann%Chg

*POTENTIAL GDP GROWTH RATE = LABOR FORCE GROWTH RATEPLUS PRODUCTIVITY GROWTH RATE**SHOWN AS A 5-YEAR MOVING AVERAGE; SOURCE: THE CONFERENCEBOARD, TOTAL ECONOMY DATABASE, JANUARY 2014

CHART 4

Productivity Plunge Dragged Down Pakistan’s Growth Potential


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

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PAKISTAN REAL CAPEX*:PRIVATE SECTOR (LS)GENERAL GOVERNMENT (RS)% of

GDP% ofGDP

NOMINAL CAPEX AS A % OF NOMINAL GDP:PAKISTANBANGLADESHSRI LANKA

% ofGDP

% ofGDP

NOMINAL CAPEX AS A % OF NOMINAL GDP:PAKISTANINDIAINDONESIA

% ofGDP

% ofGDP

*SOURCE: PAKISTAN BUREAU OF STATISTICS

CHART 3

Pakistan: Capital Expenditures Are Depressed


F The lack of capex has steadily lowered the country’s productivity, which in turn has eroded the nation’s growth potential (Chart 4). Relative to other economies at a similar stage of development, Pakistan’s productivity has dramatically lagged (Chart 5).




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1985 1990 1995 2000 2005 2010 2015

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REAL HOUSEHOLD EXPENDITURE% ofGDP

% ofGDP

PAKISTAN*:REAL GOVERNMENT EXPENDITURE

% ofGDP

% ofGDP

*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


The low potential growth rate has worsened the country’s structural inflation problem. Chances are that Pakistan will now witness high inflation, even with relatively slower growth.

F Over the past several years, Pakistan’s 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, Pakistan’s already meager national savings has been used to fund government consumption expenditures rather than corporate investment in recent years.

The government’s indulgence in fiscal largesse has seen the budget deficit deteriorate from 2% of GDP to over 8% – before it improved to 6% recently due to the IMF’s requirement for fiscal amelioration as part of the conditions for its bailout package (Chart 7).

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1990 1995 2000 2005 2010 2015

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PRODUCTIVITY*:PAKSITANBANGLADESHINDIAVIETNAMSRI LANKA

*SOURCE: THE CONFERENCE BOARD, TOTAL ECONOMY DATABASE,JANUARY 2014

CHART 5

Pakistan’s Widening Productivity Gap With Neighbors


Falling behind




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CHART 8

...Financed By Commercial Bank Deposits And...

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1990 1995 2000 2005 2010 2015

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3200

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TOTAL BANK LOANS*PRIVATE SECTOR CREDIT

% ofGDP

% ofGDP

BANK LOANS*INVESTMENTS

PAKISTANFEDERAL GOVERNMENT DEBT HOLDERS:

DEPOSIT MONEY BANKSINTERNATIONAL INSTITUTIONS

BnPKR

BnPKR

*COMMERCIAL PLUS SPECIALIZED BANKS

% ofGDP

% ofGDP


Very low

F The ballooning deficit was financed 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

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2002 2004 2006 2008 2010 2012 2014

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PAKISTAN:FEDERAL FISCAL BALANCECONSOLIDATED* FISCAL BALANCE

% ofGDP

% ofGDP

*CONSOLIDATED FISCAL AND PROVINCIAL

CHART 7

Pakistan: A Decade Of Widening Fiscal Deficit...





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CHART 10

Pakistan: Low Savings Suggest Interest Rates Need To Rise

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48

2000 2005 2010 2015

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52

48

TERM DEPOSITSAS A SHARE OF TOTAL BANK DEPOSITS

% %

Too low

F The outlook for financing budget deficits 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 financing 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 Deficient infrastructure has increased the cost of business and eroded competitiveness. Indeed, the World Economic Forum’s “Global Competitiveness Index 2014”ranks Pakistan 129th out of 144 countries – down from 91 in 2007. The World Bank’s “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 Pakistan’s trade data. Even though Pakistan exports mostly low-tech

CHART 9

...Central Bank Debt Monetization

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2.5

2.0

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1.0

.5

2004 2006 2008 2010 2012 2014

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PAKISTAN CENTRAL BANK ASSETS:GOVERNMENT SECURITIES* (LS)AS A % OF TOTAL ASSETS (RS)

TnPKR

%

*GOVERNMENT SECURITIES HELD BY BANKING DEPARTMENT PLUSISSUE DEPARTMENT

© BCA Research 2014 © BCA Research 2014




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1.4

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1.0

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.4

2002 2004 2006 2008 2010 2012 2014

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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


CHART 11

Deteriorating Basic Infrastructure...

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1990 1995 2000 2005 2010 2015

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-10LENGTH OF PAVED ROADS**(PER 1000 PERSONS):

HIGHWAYNON-HIGHWAY

Km Km

PAKISTAN:TOTAL ELECTRICITY GENERATION*

Ann%Chg

Ann%Chg

*SOURCE: PAKISTAN BUREAU OF STATISTICS**SOURCE: MINISTRY OF FINANCE


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 fiscal deficits and a crowding out of the private sector have led to a sub-optimal economic structure and an inflation-prone economy. What’s more, a lack of savings has constrained capital investment. This, in turn, has endangered the economy’s productive capacity and eroded competitiveness.

cyclical Headwinds ahead The adjustment mechanism will likely come from rising interest rates. Deficient domestic savings and even marginally diminishing foreign funding at a time of rampant government borrowing will further push up local government bond yields.




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Notably, government domestic bond yields have already been rising, even though infla-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 inflows (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 flows 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 IMF’s 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 IMF’s dictum, and could experience significant turbulence in its bond and currency markets if it doesn’t.

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

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2006 2008 2010 2012 2014

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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

-

-

-

-





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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 bank’s foreign reserves have spiked (Chart 15, top panel) as the balance of payments has been funded by several one-off inflows: 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, Pakistan’s 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, Pakistan’s annual trade deficit totals about $17 billion. The bulk of it is financed by remittances, bringing the annual current account deficit to about $4 billion. Annual net FDI is a mere $1.5 billion. The country’s capital account had plunged to as low as $500 million before temporarily rising to $7 billion on recent grants and loans.

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2004 2006 2008 2010 2012 2014

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110

100

90

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100

90

GOVERNMENT LOCAL BOND YIELDS:10-YEAR5-YEAR

% %

BANK CREDIT AND INVESTMENTSAS A % OF DEPOSITS

% %

CHART 14

Pakistani Banks Are Overstretched: Too Much Government Debt Holding

Up 300bps in one year

High





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CHART 16

Manufacturing Is Slowing Along With Money Supply


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1998 2000 2002 2004 2006 2008 2010 2012 2014

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BANK DEPOSITSM2 MONEY SUPPLY**Ann%

ChgAnn%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. Pakistan’s 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


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2004 2006 2008 2010 2012 2014

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IMPORT COVERAGE OF FOREIGNRESERVES (INCLUDING GOLD)

Mths Mths

PAKISTAN:TOTAL FOREIGN RESERVES AT CENTRAL BANKEXCLUDING GOLD

BnUS$

BnUS$

Dangerously low




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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)

% ofGDP

% ofGDP

NOTES: ALL SERIES SHOWN AS A 4-QUARTER MOVING AVERAGE

socio-political Dynamics remain complicatedOne of the main reasons behind the rally in Pakistani stocks along with foreign lending and grants to Pakistan has been last year’s rather peaceful parliamentary elections and subsequent transition of power from one demo-cratically elected government to another – the first such instance in the country’s 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-ment’s mandate, and it has become ever more dependent on the military establishment to maintain law and order.

Furthermore, Pakistan’s new constitutional arrangement of sharing government revenues between federal and provincial governments has further diluted the federal government’s 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 fiscal expenditures. This has created a conflict of priorities between the federal and provincial governments, and will likely hamper any concerted effort to rein in the government’s 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.




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CHART 18

Pakistani Stocks Are Not Cheap

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2002 2004 2006 2008 2010 2012 2014

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TRAILING P/E*:PAKISTAN OVERALLFINANCIAL STOCKS

PRICE/BOOK VALUE*:PAKISTAN OVERALLFINANCIAL 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 benefit from global multi-polarity, as Islamabad’s 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 conclusionPakistani 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.com2 Please see BCA Geopolitical Strategy Monthly Report, "Lions, And Tigers, And Bears...Oh My!", dated August 13, 2014, available at

gps.bcaresearch.com




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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 [email protected]


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




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NEU

TRAL

PosiTioNs iNiTiATioN DATE RETURN

oN EM EqUiTy BENchMARkSHORT 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

oVER

WEi

GhT

UNDE

RWEi

GhT

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%




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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 Profitability 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

http://www.bcaresearch.com/reports/view_file/14963













http://www.bcaresearch.com/reports/view_file/14510http://www.bcaresearch.com/reports/view_file/14510







http://ems.bcaresearch.com/charts/index/ems/eti

http://ems.bcaresearch.com/charts/index/ems/em-cs

http://ems.bcaresearch.com/charts/index/ems/em-cvt

http://ems.bcaresearch.com/charts/index/ems/em-es

http://ems.bcaresearch.com/charts/index/ems/em-ev

http://ems.bcaresearch.com/charts/index/ems/em-sc


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