Pakistan: Stock exchange attack highlights how rare terrorism has become
- Reportedly, all 4 terrorists shot by security forces, 2 fatalities out of 1,000 staff inside, no disruption to trading
- Attack highlights rarity of terror in recent years: civilian deaths related to terror are less than 5% of the 2012 peak
- Better domestic security and improving governance underpin investment case (trailing PB on 40% discount to 5y median)
Terror attacks are always tragic but they are not always shocking. If this morning's attack on the Pakistan Stock Exchange had occurred five years ago, it would not have been unusual in the context of prevailing chronic insecurity. This is not the case today, given that the 2020 run-rate for civilian deaths related to terror is less than 5% that of the 2012 peak and less than 15% of the 2015 level.
Improving domestic security is the foundation of the investment case in Pakistan: improving governance, stable military-civilian relations, orthodox economic policy gains, infrastructure upgrade, very cheap valuation all build on it. (Pakistan has minimal economic contribution from international tourism).
The small scale of this attack and its reportedly swift resolution do not change our views that Pakistan is a dramatically more secure place today compared to 5 or 10 years ago (and certainly in the last 5 years attacks targeting foreign visitors have been extremely rare compared to Bangladesh, Egypt, Kenya, Philippines, or Turkey).
Investment case recap
Pakistan’s economic improvement has been derailed by Covid-19 reversing growth (despite large interest rate cuts), widening the primary fiscal deficit (due to lower tax revenues); and weakening the FX rate. While lower oil prices alleviate the import bill, this is offset by greater risk to remittances from the GCC. The silver lining is decelerating inflation and rapidly mobilised external funding (IMF, Asia Development Bank).
Governance reform continues with an unprecedented public investigation into unjustifiable price inflation by the sugar cartel (which has led to a casualty within the most senior echelon of the ruling party, Jehangir Tareen in the PTI – something unthinkable under previous civilian or military governments) – and restructuring of state-owned enterprises (eg Pakistan Steel Mills).
While military friction continues at the Indian border, the confrontation between China and India is a reminder that there is an overall balance of power which constrains both sides.
Pakistan is still cheap enough and economic policy, including FX rate flexibility, is sensible enough to merit an investment case based on structural improvement in governance (a root cause of corruption, economic short-termism, and insecurity) and infrastructure (China-Pakistan Economic Corridor).
The KSE100 index is down almost 25% ytd, underperforming EM (down 8%) and FM (down 15%). Trailing PB and PE are on c40% and 20% discounts to respective 5-year medians. The FX rate has depreciated c8% ytd (real effective exchange rate is close to 100, about a 5% discount to the last 10-year median).
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