Now is the time: Investing in Pakistan

When I first visited Pakistan on an overland Europe to Asia trip all the way back in the year 2000 little did I know that the country would spend the next 15 years embroiled in the neighbouring Afghan conflict, sectarian violence as well as major internal political upheavals. Considering the country’s geo-political context its social and economic structures have coped remarkably well, albeit with a great deal of human suffering. But now there is cause for optimism, Pakistan has turned a corner helped by a massive vote of confidence from the savvy Chinese who have invested heavily in the country with an investment package worth up to $40 billion, the Karachi stock exchange has been one of the world’s best performers in recent years and the economic outlook is brighter than it has been for a long time.

Lakson Investments

I discussed Pakistan’s prospects with portfolio manager Saifullah Kazmi, who manages one of the largest portfolios in the country at Lakson Investments, one of the country’s leading asset management firms. Saifullah was bullish on the country describing it as fertile for overseas investors, either via stock market investments or long term FDI and below we learn why now is a good to time to be investing in Pakistan.

Positives

The long established Karachi stock exchange has generated 20% plus growth in the last year (and around 70% since 2013), but still remains at a 30% discount compared to regional valuations. The Karachi stock market has no correlation with US markets so it offers western investors a great opportunity to hedge. In addition the market is reasonably liquid with over 600 companies with a market cap of over US $76 billion Drilling down into the stock market investments in the food and beverages, pharmaceuticals, construction and finance sectors look to be the most promising. Pakistan is the world’s sixth most populous and it is a young population, these demographics are highly favourable for consumer trends like mobile phone users and retail goods. The China-Pak Economic Corridor (CPEC), will provide an investment of around US$ 40 billion over the next few years. China has bet heavily on Pakistan and while some may argue that these projects will give China a great deal of power over its southern neighbour, the economic benefits are hard to deny. The developmental projects in the first year alone are expected to push the GDP growth rate up from 4% to 6%. Clearly these are based on assumptions; but in time the actual figures will speak for themselves. Lastly the country’s rumoured to be due an upgrade to emerging market status by the MSCI, which will give it additional crediblity in the eyes of global investors.

Negatives

It is no secret that Pakistan is often suffers from a poor image in the west and other parts of the world, sometimes this is unfair, at other times it reflects real issues which pose serious obstacles to the country’s development. Pakistan faces external challenges such as troubled relations with India and of course an conflict ridden neighbour in Afghanistan, managing these ties effectively is critical for the nation’s geo-political position and economy. While Afghanistan is unlikely to turn into an economic powerhouse very soon, relative stability can bring benefits to both countries, India and Palistan are unlikely to resolve their territorial dispute or become best friends very soon, but that does not preclude economic relations improving. China and Taiwan are diplomatic oppenents but still have strong trade and investment links. Pakistan also has a poor governance record, business people regularly complain of corruption and excess red tape, these problems are of course familar with those operating in frontier and emerging markets, but should be considered before investing in the country.

How to get involved

For those wanting to take a stake in the Karachi exchange firms like Lakson Investment will do all the paperwork and advise you on your local stock markets portfolio, give you pointers on the most promising industry sectors and provide “on the ground” intelligence for those not located in Pakistan. Investing in this manner means you have control over your investment decisions and can look for undervalued companies in the market. Others may wish to look at a single country ETF  – exchange traded funds, which are now open to individual investors. For those really wanting to throw themselves in the deep end there are of course private equity investments to be found, but unless you already have strong contacts you should listen to a professional investment firm before considering a move in this direction.

China – Pakistan Relations

China’s involvement in Pakistan has been documented on this site a number of times and it is clear that for political reasons China view Pakistan as a key long term ally and is keen to ensure it remains stable. China’s involvement in Pakistan will be one of the centre pieces of its new Silk Road strategy and it will be interesting to see how far China will intervene to assist Pakistan should it face a fresh crisis, economic or political.   Pak-china

Gwadar Port

A key plank of Chinese – Pakistan engagement is the development of Gwadar Port, potentially a US $12 billion sized project. For the Chinese the development of an alternative shipping route bypassing the Straits of Malacca is an imperative, as this could be easily blocked by a hostile power. The key commodity in mind is oil and the port will include an refinery allowing exports to come from the Persian gulf to Gwadar then onwards to China. This alternative also represents a shorter route for users in western China, otherwise the oil has to go from the east Coast ports like Shanghai, then all the way inland. For Pakistan the development of the port will help insurgency hit Balochustan, the government hopes economic development will help bind the region to the nation, undermining its separatist movement.    



Categories: Country Investment Analysis, Frontier Market Strategy, Frontier Markets

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