Pakistan: The reform story foreigners forget

  • Economics: Restart of IMF program (US$4.6b, c30% of FX reserves, yet to be released) instils confidence in hard reforms
  • Politics: Senate election in March should reinforce ruling party PTI's grip, of course, with tacit military support
  • Valuation: Equities are cheap, Banks dividend yield more than government bonds, FX near fair value
Pakistan: The reform story foreigners forget

Pakistan is such a small market, with merely a 0.02% weight in MSCI EM, that one might reasonably ask why any foreign investor should care about it? The foreign outflows of the last five years are a testament to this.

For those foreign investors not enslaved by the tyranny of the index, jaded by many previous false dawns, or, simply, lacking the time to challenge obsolete concerns about safety and the integrity of the nation state, there is a hidden gem being fashioned.

This week's positive IMF review should instil confidence in the outlook for economic policy and next month's Senate election should increase the prospects of a steady political course under the leadership of the PTI and the military.

Of course, there are risks and potential setbacks: food price inflation and the oil price increase, financing challenges in the power sector, a deceleration in remittances, higher imports as growth picks up or an episodic escalation in the conflict with India.

But Pakistan equities and FX rate appear cheap relative to history – there is compensation for risks and setbacks. Indeed, portions of the equity market, eg the banks, appear cheap versus local currency government bond yields (traded value is overwhelmingly driven by locals and their inflows should act as a catalyst for a re-rating even if foreigners, in the case of large EM funds, are too distracted, or in the case of dedicated funds, too small).

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Pakistan equities: large foreign outflows since 2015

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