The upcoming meeting (22 July) between US President Donald Trump and Pakistan Prime Minister Imran Khan will be worth watching, if for no other reason than to see how the pair might interact following their Twitter spat from November 2018 (Figure 3).
However, the meeting is not going to change the gravitational, geopolitical pull on countries in South and East Asia between the US and China, and, in the case of Central Asia, between the US, China and Russia (Figure 1).
We suggest ignoring the mainstream media tropes, which are likely to litter coverage of the trip ("duplicitous Pakistan must do more" on the one side, and "the hypocritical US abandons its allies when it no longer needs them", on the other). Instead, the meeting should be a reminder of two factors for investors in South Asia:
- India – The nature of the strategic relationship with the US does not preclude the latter from engaging with the likes of Pakistan on a tactical basis. And despite the recent disagreement of tariffs on Indian exports to the US and employment visas for Indian citizens, the motivations for the US to align itself with Indian interests are durable: global competition with China and the much greater scale of the Indian market for US corporates compared with any other Asian market. Unlike US alliances in the Middle East and Far East, the US-India strategic alignment is not grounded in guaranteeing oil supply and/or is not pursued via the deployment of US military assets. The long-term commitment of the US, at least on the terms seen historically, to both oil supply and military deployment is in question (eg an increasing cost of foreign US military deployments may be borne by those countries whose security is being guaranteed). Therefore, India, does not need to plan for a different or less reliable US partnership unlike the GCC or Japan and South Korea.
- Pakistan – While the long-term strategic interests of the US (alignment with India to balance China) and Pakistan (alignment with China to balance the US and India) will diverge (until Pakistan and India see more benefit in cooperation, rather than competition, among themselves), this meeting is an indication that, for now at least, the orderly withdrawal of US troops from Afghanistan (Figure 2) requires cooperation from Pakistan (given its influence over the Afghan Taliban). This has already been evident in the softening of US rhetoric around the IMF loan programme for Pakistan (now approved) and may portend a softer tone on FATF. (As a reminder, we are positive on Pakistan equities).
Geopolitical risk matters: In the last decade, Egypt, Lebanon, Pakistan, Qatar, Saudi Arabia, Sri Lanka, Turkey and Vietnam are all examples of top-down investment cases over-run, for a period of time at least, by discussions on location and international relations, rather than growth and valuation.
Source: Tellimer Research
Figure 2: Trump wants to draw down US troops in Afghanistan
Source: US DOD, NYT, WSJ, WP, CENTCOM