Investing in Pakistan?

This week the Chinese Premier Li Kequiang met with the  President Asif Ali Zardari and the Prime Minister elect Nawaz Sharif, the leader of the Pakistan Muslim League (PML). The purpose of the meeting was to promote and revitalise the economies of both Western China and Pakistan. Their intention is to try to create an economic corridor between the two countries.

It appears as if the Chinese Premier is totally intent on spreading China`s markets away from their dependence on the old unreliable developed world markets. Since becoming Premier he has made visits to most of the Asean countries, and also to Japan and to Indonesia. China has also increased its investments into Africa and into South America. Put all of this together with their drive to increase internal consumption at home and you can see that in not too many years time China will have stabilised its manufacturing to meet demand. China will yet again be a great place to invest.

Pakistan is a nuclear armed country with a population of over 150 million people living in what many people in the world regard as a failing State. Pakistan is ranked 146th out of 186 countries in the United Nations human development index. This country faces a daunting array of problems which include Islamic unrest, a failing currency, a static economy and failing power supplies to name but a few.

At the recent elections Nawaz Sharif was given a sizeable mandate to try to rectify the country`s situation. Sharif is the co-owner of the massive two billion dollar conglomerate the Ittefaq group which is involved in steel, paper, sugar, textiles and engineering. He is a conservative, pro-business devout Muslim and this will be his third time in office. His first problem will be to persuade the World Bank and the IMF to make future loans to Pakistan in order that it might meet its existing foreign debt obligations. Sharif`s slogan is a “Strong economy will make a Strong Pakistan”. He is seen as a flag bearer for private industry and entrepreneurship.

Trade between China and Pakistan is already on the rise and at last week`s meeting a two year target was set to achieve a trade turnover between the two countries of 14 billion dollars. The Chinese are already involved in the building of new power stations and road and rail projects. These are all designed to increase the ability of the young low wage earning population to become gainfully employed and improve the GDP of Pakistan as they become meaningful producers and consumers.

The Karachi stock exchange has around 500 registered companies on its books. That is tiny in comparison with its neighbour India`s stock market which has ten times this amount. However it is worth noting that on the announcement of Naway Sharif`s election the Karachi stock exchange rose to its all time high of 20,300. This man would appear to have the knowledge and intention to drag Pakistan into the 21st century. Provided he can avoid execution by terrorists and he continues to be assisted by his Chinese friends then perhaps he just might manage this task. So perhaps we should put Pakistan on the watch list for investment alongside the Asean economies and Indonesia.

Shale Gas

Natural Gas is the Earth`s greenest fossil fuel. In the U.S.A. it now costs 20% less than oil to produce the same amount of useable energy. It has the ability to replace oil, be it for engines, heating houses or simply producing electricity. Shale gas can be found in all the continents, but is particularly prolific in America and Great Britain. As the means of extraction improves and technology advances, it is quite feasible that these countries’ energy needs may be satisfied for the 150 years.

So what`s not to like? Well the new method for extracting this gas from deep below the earth`s surface is called “The Fracking Process”. It involves pumping water, steam and fluids at very high pressure into the layers of shale and this releases the trapped gas. (A bit like taking Epsom Salts.) The concern with this process is that it could release “nasties” into the water table and could also cause minor earth movements. The Extraction Industry is well aware of the problems and undoubtedly will come up with the solutions. The financial gains are so huge that this must be a certainty.

If this all comes to pass, then it does beg some interesting questions of the future. If the demand for oil drops and the price collapses as the West converts to gas where will the Middle Eastern Arab states sell their oil? Will a falling income see these States return to the conditions of a century ago? If they do, what happens to the West`s Armament Industry? Perhaps they will have to fall back on manufacturing peaceful products like washing machines and desalination plants.

These are questions for the future. Today we are interested in how we might take advantage of this changing energy scenario. The price of natural gas has already tumbled in the USA and is likely to harmonise across all users. It is after all a simple commodity. You recover it, transport it and then use it. However for this to happen vast sums of money will have to be spent in a number of industries – the gas recovery industry, the engine conversion and electrical generation industries and finally the means of getting it to the customer. All of this expenditure will have to be recovered through the pricing structure. So just maybe the price of gas will not fall further and may in fact have to rise to allow these industries to make a profit.

At Saltydog we must locate the Fund Managers that are investing into those companies which are on the supply side of these new Industries.  Coal had its day and now it looks as if Oil maybe going to hit the buffers. Perhaps we are now about to enter the Age of Gas.