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Investing in recessionary period

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KARACHI:

Recession is a new buzz word in every other drawing room. The educated, the salaried, the retail shopkeepers, the industrialists and the blue collar all are worried about the onslaught of an upcoming recession.

Most link it to the rising commodity prices, particularly the prices at petrol pumps, and some link it to the uncontrollable PKR depreciation over the past many weeks. Some comment that the Russia-Ukraine war and the fight to become the super power is plunging the world into a state of supply glut and demand reduction.

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This environment is more a testing time of nerves. For a commoner, the challenge becomes twofold. Primary inflows tend to stagnate and the secondary source of income fizzles out.

Cost pressures continue to mount as prices spiral due to the input price hike coupled with supply line congestion. As recession deepens, we may see a reduced level of consumption, especially towards consumer products, resulting in potential job losses.

Keeping in view the current economic fundamentals, how should an investor plan to allocate his funds is one of the pertinent thoughts.

A prudent person with cash flows higher than his current consumption and free assets available for investment needs to take a deep dive to identify how to tread forward in these times of dire volatility.

My thought process would be to take a hard and tough review of the portfolio and undertake the following activities:

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De-risking the portfolio

One of the first steps that one needs to take is to ensure that the portfolio is clear of any toxic assets. Assets that create MtM cause undue volatility in the existing portfolio, which in slow and recessionary periods continue to erode the portfolio value at an undesired pace.

An essential step is to deleverage the existing portfolio and clear the books of any unwanted risk.

Avoid obsession with revaluation

Due to the prevailing uncertainty across the globe and specifically within the country, there would be large swings with prices moving in both directions.

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Revaluing the portfolio frequently and tracking its value results in unwarranted stress and would cloud the decision-making process. This is not to downplay the value of investment timing.

Timing the investment

A thoughtful review of the asset and asset classes needs to be undertaken to identify the short-term and long-term economic, political and financial situation. This would help build up a path of how prices would move and help in averaging out the investment outlay.

Portfolio bifurcation

A deep thought needs to be undertaken by the asset holder to evaluate his needs for funds. In these testing times, I would look into bifurcating the portfolio into the following key portions:

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Emergency funds: This is the kitty that helps cushion the pressure on the standard of living due to any untoward incident, causing a drop in income levels or due to any unwarranted increase in spending caused by price hikes.

These should be invested in highly liquid assets that offer consistent returns, simulating the fixed-income portfolio.

The aim should be to have three to six months of living expenses held in this liquid assets portfolio to ensure one has a solid emergency fund in existence. Worth noting is that the “Cash is King” during recessionary periods and one needs to remain liquid.

Long-term portfolio: Of the remaining assets, funds should be equally divided into long-term portfolio and opportunistic portfolio.

The long-term portfolio should be chosen carefully and assets should be cherry-picked based on their future potential rather than undervaluation. The time horizon under consideration for holding the assets should be between five and eight years.

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Be ready to see lower valuations in these assets during the first few months but one should keep an eye out for the long-term potential instead.

Look at building a portfolio of defensive stocks as they tend to be insulated from ups and downs. Healthcare, utilities and consumer staples tend to remain stable across a business cycle as they have a low beta. Follow an averaging policy and keep an eye on the quality of assets.

Opportunistic portfolio: During this period, a multitude of assets would look cheaper and a greater number of assets/ securities could become cheaper than today.

Generating alpha in this period requires an aggressive and continuous monitoring of a select group of assets. The game plan is to first conduct a dispassionate review of the various categories of assets and narrow them down to certain key assets that one has a liking for.

Post the short-listed, as the game is in timing the investment right and identifying the pullback. The effort one puts in is in trying to pick them near the bottom and exit them before the pullback loses steam.

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Assets tend to move in waves, especially during the recessionary period, and the thought process is to ride the curve.

Don’t overreact

Be prepared for a rocky ride. Avoid knee-jerk reactions both on the buying and selling sides of assets with a view to riding out the inevitable bumps. One of the reasons for reducing trading is to avoid extra costs.

Instead of taking sudden steps to change lifestyles to increase savings, drip feed your saving account and make slow but sustainable changes. These will help not only in the challenging times leading up to and during recession but would also help later on.

While recessions can be challenging for returns and growing wealth, we would also see countercyclical rallies as the market turns back to its natural state of forward looking.

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The key is to remain invested, not be whipsawed by short-term market gyrations, and to stay focused on your long-term goals.

Create safety nets and emergency funds but ensure that the cost of creating those nets stands low. Stay positive as recessions and downturns don’t last for long.

Looking in the rear view mirror, it is observed that most recessions have been over in nearly less than half a decade. So hang in there and remember that the “best of opportunities are typically found in difficult environments”.

The writer is a student of behavioural finance, a treasury and wealth management professional and a visiting faculty at IBA

 

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Published in The Express Tribune, November 14th, 2022.

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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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