After 18 years as a banker at firms such as Citigroup and Nomura, Shaheryar Chishty took a different direction in late 2011, starting an investment firm that, among other things, helped guide Chinese and South Korean money into Pakistan.
While Pakistan is probably not the first place the average investor would choose to park cash, Chishty’s timing was spot on. The country’s stock market surged 49% last year to become one of the five best performing markets in the world.
The victory by former prime minister Nawaz Sharif in the general election lifted the Karachi stock market to an all-time high on Monday, in a sign that investors, which include Goldman Sachs and Mark Mobius of Templeton, are betting on the prospect of further market gains through a stable government.
“I’m not under-estimating the challenges, but we have one party with a simple majority,” Chishty, the Pakistan-origin chief executive of Asiapak Investments, told Reuters in an interview in Hong Kong on Monday. “A lot of the market’s rise happened despite the previous government.”
Risks, especially violence by Islamic militant groups, remain constant, yet the KSE is up another 21% this year, behind only Japan and the Philippines as Asia’s top gainers, according to Thomson Reuters data.
Pakistan’s uncertain security environment and a deteriorating economy have failed to keep emerging market fund guru Mobius and Goldman Sachs Asset Management out of the country.
Mobius invested 4.6% of his $18.5 billion Templeton Asian Growth Fund’s assets in Pakistani shares as of the end of March, more than his exposure to shares in Hong Kong, Singapore or Taiwan, according to data from Thomson Reuters Lipper.
“Pakistan is not a small country and it is strategically significant. However, with the negative press surrounding the country, it has tended to be ignored by investors,” said Mobius, executive chairman of Templeton Emerging Markets Group.
Last year, 15 equity funds from Pakistan were among the world’s top 100 performers, the Thomson Reuters Lipper data show.
Nevertheless, investors will have a hard time ignoring Pakistan’s struggling currency and its economic woes.
Pakistan will likely have to turn to the International Monetary Fund to provide it with a multi-billion dollar bailout without which government finances could hit the wall in the next six months or so.
Moody’s this week said the new government faced many hurdles and retained the negative outlook on its Caa1 rating, just three steps above default and seven below investment grade.
The rating agency said the government faces challenges such as energy shortages, external liquidity vulnerability, and forex reserves which have halved to $6.7 billion in the last one year.
Yet, Pakistan sovereign bonds due in 2036 are yielding 11%, down from 12.2% a month ago.
New economic team
Nawaz Sharif, almost certain to be sworn in as prime minister for the third time, has said fixing the economy is his top priority. He has suggested he would be willing to implement politically sensitive reforms to secure an IMF lifeline.
Ishaq Dar, set to be the new finance minister, has said he plans to lean on provincial governments to collect agricultural taxes, a policy that could set him on a collision course with some of the wealthy supporters of the Pakistan Muslim League - Nawaz.
Chishty, of Asiapak, pointed out that two of Pakistan’s main problems are its poor tax collection and lagging energy sector. But he said the country’s market has a strong downside protection from the support it receives from the United States and Saudi Arabia.
Pakistan, the world’s sixth most populous country with nearly 200 million people, shares some of the same qualities that have made some emerging Asian countries the darling of global investors: a rising middle class, which in turn has created a boom in consumer spending.
Consumer stocks in Pakistan, as a result, have become relatively expensive, though on the whole, the market remains cheap. It trades at 7 times 12-month forward earnings, or 41% below the average for the Asia-Pacific region, according to data from StarMine.
The market run came in part from a rule last year allowing so-called black money to be invested into the economy, which critics said was an endorsement of money laundering and supporters said was a smart way to expand the tax base.
That rule is set to expire in July next year, with investors waiting anxiously to see if Sharif will extend the deadline, to allow more money to flow into the market.
Published in The Express Tribune, May 16th, 2013.
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