Pakistani
stocks present one of the world's most attractive
investment opportunities. Buoyed by sensible
economic policies following years of misrule,
Pakistan's real GDP grew by 8.4% in 2005, making
it the best performer in the world after China.
Pakistan's
stock market has also followed this strength
in the underlying economy with the Karachi Stock
Exchange posting some of the highest returns
within the global emerging market universe over
the past four years.
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On
the second day of trading after the earthquak,
the Karachi Stock Exchange only lost 0.25
percent, to close at 8,520.72 points.
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This
is despite the fact that it is one of the world's most
under-researched markets and as a result attracts minimal
foreign investment. The Pakistan market is currently
trading on a FY05 PE multiple of 10.1x, according to
BMA estimates. This is an average of a 37% discount
to the Asia Pacific region and a 71% discount to the
Middle Eastern markets. Average daily market turnover
YTD is over US$570m, which is more than the combined
turnover of Thailand, Malaysia, Indonesia and the Philippines.
"Pakistani
equities are trading at attractive discounts, offering
tremendous medium to long-term opportunities for Middle
Eastern investors", according to Muddassar M. Malik,
Chief Executive of BMA Asset Management. "One of the
ways in which Gulf investors can share in the tremendous
growth occurring in Pakistan is investing in Mutual
Funds which in turn invest in the Pakistani Equity markets".
BMA Capital is one of Pakistan's Premier Investment
Banking Groups, of which BMA Asset Management is a wholly
owned subsidiary. Last year Abraaj Capital, the Dubai
based leading Private Equity firm of the Middle East,
entered into a 50/50 Joint Venture with BMA Capital
to grow the Groups businesses in Asset Management, Real
Estate, and Private Equity. BMA made history recently
by advising Etisalat on the acquisition of PTCL, Pakistan's
State-owned Telecom Monopoly.
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"Against
the backdrop of rising oil prices and the resultant
capital surpluses in the Middle East, Pakistan's
proximity and cultural affinity with the Gulf
oil producing nations has led to the nation attracting
significant investments emanating from the Arab
world."
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Mr.
Shehryar Ahmad |
The
market's decline and consolidation of recent weeks,
is mostly the result of technical and regulatory factors
such as the phase out of "Badla" financing. As a result
the KSE100 index is currently down 26% since its peak
of 10,303 in March 2005. Higher interest rates have
also drained some of the liquidity from the market.
In the medium term, domestic mutual funds, pension funds
commercial banks and leading business groups are expected
to bring in strong inflows as the Securities and Exchange
Commission of Pakistan and the Karachi Stock Exchange
work to find a solution to the "Badla" financing issue.
The total size of fresh money inflows from domestic
investors could be in excess of USD 1 billion over the
coming 12 months.
The
KSE 100 Index has undergone a sharp re-rating since
2002. While the market is off its peak of March 2005,
the KSE100 is still up 22% YTD in 2005 and remains one
of the best performing equity markets in the world.
Corporate
earnings are expected to grow by over 20% in for FY'06,
implying an FY'06 PE multiple of 8.4x and a dividend
yield of 6%.
This
compares favorably to most Asian stock markets' valuations.
The 10-year Pakistan Investment Bond yield at 9.4% implies
a notional PE multiple of 11.1x for fixed income instruments.
With earnings expected to grow 20% this year, a target
PE multiple of 13x to 14x for equities would appear
reasonable, implying an index level above 10,000 or
40% above current levels. Supported by high liquidity
levels, earnings growth will be the major theme in any
market upswing. The key sectors to be targeted by investors
in the country include Energy, Banking, Telecoms, Fertilizers,
Textiles and FMCG's.
Pakistan
is fast becoming a case study in successful economic
re-engineering in recent years. The global economic
downturn has underscored Pakistan's continued success
at attracting growing domestic and international investment.
Though international economic growth has slowed post
9/11, Pakistan has proved itself one of the most sought
after investment destinations in the world. Reforms
aimed at improving governance have borne fruit. Pakistan
has posted the highest growth rate in the world after
China at 8.4% (GDP growth), and the international investment
community is now starting to take notice.
Gen.
Pervez Musharraf took over the reins of power in 1999
with a promise to reform Pakistani governance. To this
end he appointed Citibank Senior Executive Shaukat Aziz
initially as Finance Minister to clean up the economic
mess left after years of misrule. Aziz' savvy understanding
of the fiscal and economic medicine that Pakistan desperately
needed paved the way for greater reforms in the government
and regulatory authorities such as the Central Board
of Revenue, State Bank of Pakistan, etc. For the first
time in recent Pakistani history, Musharraf and Aziz's
team of economic managers were able to have a stable
Rupee. This caught the notice of the domestic and expatriate
Pakistani investor. Coupled with this came a wave of
growing worker remittances and reverse flight capital
in the wake of the 9/11 attacks in the US. Unofficial
money transfer channels known as "havala" were shut
down and official coffers began growing as a result
of the official bank transfers.
The
Musharraf Government's role as frontline state in the
global war on terror proved a watershed in the nation's
image building. Pakistan is again perceived as a country
that shares the values of the international community
to fight intolerance and extremism. The resultant economic
benefits have strengthened the hand of Islamabad in
continuing and deepening the reformist agenda. Shaukat
Aziz has been elected Prime Minister and has vowed to
continue his policies of the last 6 years. Political
stability, and continuity of policy, which had been
painfully lacking in Pakistan was the elixir of life
for the rebirth of the Pakistani economy.
Prime
Minister Aziz engineered a massive private sector credit
expansion (encouraging banks to issue credit cards,
auto loans, home loans, etc.), which has created an
economic boom with surging demand on all fronts. The
stable policy environment and buoyant economic growth
has resulted in a renewed focus on modernization of
existing production facilities and capacity enhancements
in the automotive, textile, cement, and telecommunication
sectors. With over 41% growth in capital goods and raw
material imports in 2005, the trade balance has admittedly
tilted. However, due to strong inflows into the capital
account, resulting from expatriate Pakistanis sending
money home and a surge in foreign direct investment
proceeds, the current account deficit remains benign
at 1.2% of GDP. During 2005, Pakistan has been the recipient
of over USD 1.52 billion in FDI flows, which is a telling
and impressive improvement upon the average of USD 874
million over the previous two years. This is excluding
the recent USD 2.6 billion FDI inflow from the privatization
proceeds of Etisalat's acquisition of 26% shares in
PTCL, Pakistan's state owned telecom monopoly.
Against
the backdrop of rising oil prices and the resultant
capital surpluses in the Middle East, Pakistan's proximity
and cultural affinity with the Gulf oil producing nations
has led to the nation attracting significant investments
emanating from the Arab world. Notable among these are
Etisalat and Warid of the United Arab Emirates, who
have both invested heavily in Pakistan's telecommunications
sector. Middle Eastern investments in the energy sector
include the recent acquisition of the state-owned National
Refinery at a significant premium to the market price.
Sheikh Al Nahyan's Abu Dhabi Group, in partnership with
the Bestway Group of the UK, acquired United Bank Limited,
and EMAAR Properties and DAMAC have recently invested
in Pakistan's real estate sector. These are illustrative
of the growing confidence of the international investment
community in Pakistan. These continuing capital flows
are likely to provide significant support for asset
prices moving forward.
The
time is ripe for the international community to build
up their exposure in Pakistan's equity markets. Domestic
investors have been reaping windfall profits and the
continued and accelerating economic expansion promises
dividends to the educated and timely investor. Gulf
investors who are in tune with the regional economic
scenario will surely take advantage of the opportunities
emerging in Pakistan.
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About
the author
Shehryar
Ahmad is Vice President at BMA Capital. He can be reached
at Shehryar@bmacapital.com
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