Pakistan’s correct FX and Equity market levels.
By: Tarique Khan Javed
President, Overseas Pakistani Investors Forum.

Pakistan’s correct FX and Equity market levels__________________________________Dated:14/10/2008
The cumulative inflation since 2004 conservatively estimated at 50% implies that our FX rate against US Dollar should be 93 (62x 150%) to bring equilibrium in our economy. Without it the exports will suffer while imports would look cheap leading to widening trade deficit.

As a consequence of the inflation the deposit rates have moved upto 14%. Therefore the return on our equity market has become unattractive at current levels. A return of 14 on deposit implies PE ratio of 100/14 =7.14. In order to beat this; the Equity market must have a PE ratio of 6. In order to get that ratio our market should fall more.

The fall from 15700 level to current 9,180 is justified. At current level PE is 7.22. To reach the level of 6 the market will need to drop to 7,628 level. This will mean a further drop of 16.91% from current level.

Once we reach the level of 6 Pakistani market would look attractive to foreign investors. At that level we shall be perhaps beat other countries and become one of the cheapest markets. Provided they also do not fall further.

Currently countries with better PE ration than Pakistan are:
Thailand - 6.12, Oman -6.23, Italy S&P 6.78,UAE DFM -6.84, South Africa All shares -7.03 and Malaysia Composite 7.07.

One the currency and equity market reach their true economic levels equilibrium will be restored. Foreign investors having satisfied that they will not suffer more FX losses will invest in our Equity market already adjusted to correct level. The local investors would start shifting their deposits to equity investment.

Once inflation is allowed its consequences like:
1.Increase in interest rate (Phillips Curve).
2.Depreciation of currency value in FX market.
3.Drop in Export and increase in Imports.
4.Drop in Equity market.
5.Rapid increase in poverty.
6.Social and political unrest.
7.Confused investment climate locally.
8.Flight of capital.

Can not be avoided for long. Delay in taking corrective action only compounds the problem. The only way to avoid these dire consequences are by not printing notes beyond the economic growth level.