Pakistan is cynosure of investors’ eyes: The Economic Times

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ISLAMABAD, Mar 10 (APP): Despite its reputation as a failed state and a breeding ground of Islamist terror, Pakistan may be on the radar of investors hunting for an economy poised for long-term growth, an article carried by The Economic Times, India’s largest business newspaper, said.
“On March 17, six companies listed on the Pakistan Stock Exchange will be included by FTSE (Financial Times Stock Exchange) in its Global Equity Index Asia Pacific series for the first time.
“Later, in May, MSCI – an index widely tracked by fund managers – will upgrade Pakistan from its ‘frontier market index’ back to its ‘emerging market index’,” it added.
With a return of over 50%, the Pakistan Stock Exchange benchmark index was the best performer in Asia last year, hitting a record in January, the article noted.
“Besides growth in corporate profit, disposable income, loan demand and power generation, factors working in favour of the troubled nation are its links with China, as evidenced by the much-touted $ 50-billion China Pakistan Economic Corridor (CPEC); the ruling government scrambling to fulfil its promised power sector reforms ahead of elections next year; and the emergence of the middle-class consumer,” the article added.
The World Bank has forecast the economy to grow 5.2% this year and 5.5% next year.
“A GDP growth of 5% even with negative contribution from agriculture makes a good case of GDP to grow more than 5% in the coming year,” The Economic Times quoted Mattias Martinsson, CEO of Sweden-based Tundra Fonder, a Pakistan-dedicated equity fund managing $150 million, as saying.
According to the article, “Investors can’t ignore Pakistan’s equity market with underlying trends similar to that of India: corporate profitability, secular earnings growth trajectory and low penetration of several consumer products.”
“Besides, valuations of Pakistan’s stock market being at a 50% discount to major emerging markets such as India, Indonesia and Malaysia, it offers a favourable risk-reward ratio,” the paper quoted Martinsson of Tundra Fonder as saying.
“On its inclusion, Pakistan will command a weight of around 0.2% in the MSCI EM index. This could lead to $ 250-275 million flowing into Pakistan’s equity market,” it added.
According to the newspaper, the FTSE’s inclusion of six Pakistani stocks will translate into an inflow of $ 56 million. These flows are badly needed following a surge in the current account deficit, which stands at $4.7 billion for the first seven months of FY17, it added.
International investors will weigh their bets on Pakistan against some of the lurking concerns: a high deficit; record debt-to GDP ratio; dearth of liquid stocks; and continued stability of the Pakistan rupee against the dollar, which implies 10-15% overvaluation against the US currency on a real effective exchange rate basis, the article said.
What’s also exciting investors is a surge in auto sales, offtake in cement, rise in property prices, benign inflation and lower interest rates, it added.
“Last 30 years Pakistan has suffered due to violence and terrorism that cost its economy $20 billion,” the paper quoted Amin Hashwani, former president of the Pakistan-India CEOs Business Forum, as saying.
“Today, a comparatively better security environment, heavy investment related to CPEC, increased domestic investment and enhanced overseas remittances have triggered growth.”
According to the article, the CPEC investment would be the equivalent of nearly 20% of the country’s total GDP.
During its recent earnings call, the management of Habib Bank, one of the largest lenders in Pakistan, told investors that it expects loan growth momentum to continue with aggressive targets for consumers and small and medium enterprises (SMEs) and an acceleration in the corporate book due to CPEC-linked financing, it added.
According to Farhan Rizvi, Pakistan strategist for Credit Suisse in Singapore, the paper said, financial services remain the most preferred sector for investors, encouraged by the acceleration in credit growth.
“We see another 12-15 months of robust demand growth led by the government’s increasing focus on infrastructure and power projects ahead of the elections in 2018,” he said in a note.
Referring to the higher consumer spending, the newspaper said, consumer spending in Pakistan has increased 83% in the past five years compared with 49% in the Asia-Pacific region, according to Euromonitor International, a consumer research firm. Its forecasts show Pakistan’s disposable income has more than doubled in six years.
“There’s increased consumer disposable income on account of lower fuel prices, low inflation, benign interest rates and high property prices,” the article quoted Mohammad Abdul Aleem, secretary-general of the Karachi-based Overseas Investors Chamber of Commerce and Industry, as saying.
“Besides, increased government oversight has reduced the quantum of funds being routed to Dubai.”
According to the article, passenger car sales crossed 200,000 units in FY16 for the first time. Suzuki, Pakistan’s largest car maker, along with others like Honda, Kia Motors and Hyundai, is expanding capacity. Motorcycle sales grew 19% to 22 lakh units in 2016 – also a record. Other sectors are bustling too.
Nestle Pakistan’s revenue has grown at a compounded annual growth rate of 15% in the past five fiscal years. Last year, Turkish home appliances maker Arcelik and Dutch dairy giant Royal Friesland Campina NV made acquisitions in Pakistan.
“The combined impact of better power supplies, tackling of fringe elements and incentives for corporates is gradually changing foreign investor perception about Pakistan,” said Aleem.
Perhaps the global sentiment on Pakistan can best be summed up in the words of a Singapore-based emerging market fund manager:
“The Pakistan of today is similar to that of Colombia of the late 1990s. Back then, words like drugs, gangs, and failed state were freely associated with the Latin American country. Today, Colombia has a free-trade agreement with the US, a stable 3.5% annual GDP growth and vastly improved security,” the newspaper concluded.