By Nirgunan Tiruchelvam
Appearances can be deceptive. Pakistan is viewed as a backwater riven by violence. The gory images of the Easter Sunday massacre in Lahore have monopolised headlines. Violence, largely from Taliban- linked insurgents who want to impose their perverse version of Islam, has killed 60,000 people in the last 15 years.
Yet, the real story in this country, with a population larger than that of Russia, is vastly different from images on Western TV. Pakistan is not the only country riven by terrorism, as the recent carnage in Europe shows. It is a captivating investment destination on the cusp of rapid growth.
In fact, its stock market is among the best-positioned frontier markets. It has been more than seven years since the restoration of civilian rule. Pakistan’s civilian rulers are not angelic, but they have lessened the warlike approach of Pakistan’s military.
Many countries have a military, but Pakistan is the only military with a country. The military budget is US$7.6 billion ($10 billion), but the military’s private business empire could be worth almost three times that amount. Pakistan’s officers manufacture products ranging from cement to cereal and own 12 million acres of land.
The military has ruled for about half of Pakistan’s history since independence. It has fought four wars against the country’s existential foe, India, and spearheaded a proxy war in Afghanistan. Happily, its largesse has distracted it from intervening in politics since 2008.
Relations with India have improved since Nawaz Sharif returned to office in 2013. Sharif, who has been prime minister twice before, is emphatically pro-business and was at the forefront of the privatisation programme in the 1990s. He is also a religious conservative backed by the Islamists. His conservatism is matched by his counterparts across the border. India is headed by the Hindu nationalist Bharatiya Janata Party of Narendra Modi. Both governments are secure in their milieu and intent on dialogue, which is fortuitous for Pakistan.
China is pivotal to the US$270 billion economy’s emergence, Sharif is boosting infrastructure with support from China, as a lack of infrastructure has throttled Pakistan’s growth.
China has stepped in to fill the gaping hole, particularly in the power industry. Massive investments boosted Pakistan’s foreign direct investment (FDI) last year. It received 39 greenfield investments totalling US$18.9 billion, representing a 148% y-o-y rise. Most of the investment was from China.
China has overtaken the United Arab Emirates as the country’s top investor. Shanghai Electric Group, a manufacturer of power generation and electrical equipment, is building a 1,320MW coal-based power project in Tharparkar. The power and energy sector comprised more than 65% of FDI into Pakistan last year. The transport sector is another source of investment, with 12 planned projects worth a total of US$3 billion.
Pakistan’s chronic disability has been its reliance on imported energy. The oil price collapse from US$140 a barrel to US$40 a barrel is a godsend. Oil imports are a third of its total imports. Its petroleum import bill in 2015/16 may be half the level in 2013/14. Pakistan’s current account deficit has fallen 49% y-o-y to just 0.5% of GDP. Foreign reserves are solid at US$22 billion.
Pakistan is one of the few markets with a buoyant IPO market. The steel sector, which is a direct beneficiary of the infrastructure upgrade, is prominent among the listings. Amreli Steels raised US$17 million in an IPO to double its capacity. Mughal Iron & Steel Industries’ IPO was 25 times oversubscribed.
Cement, another infrastructure-related sector, is on the move. DG Khan Cement, controlled by billionaire Mian Muhammad Mansha, and Cherat Cement are doubling their capacity.
The infrastructure expansion provides fuel for Pakistan’s nascent export sector. At US$29 billion, exports are just 11% of GDP, a fraction of the export contribution in the Asean economies. Pakistan’s exports such as textiles, wheat and cotton are likely to surge as the shackles of poor infrastructure are removed.
Frontier markets such as Pakistan have limited correlation with traditional asset classes such as develop ed arkets. In the last five years, the country’s main equity index has outperformed the Standard & Poor’s 500 index by a factor of 1.9 times.
At eight times FY2016 earnings, Pakistan’s market is trading at a 42% discount to MSCI Asia’s priceto- earnings ratio. At 6%, its dividend yield is three times the riskfree rate in Singapore.
Investing directly in Pakistan’s stock market is cumbersome, as many people view the country as isolated. Actually, there is a Pakistan exchange-traded fund that trades in Singapore: DB X-Trackers MSCI Pakistan. As with the security situation, Pakistan’s rosy reality radically differs from popular perception.
Nirgunan Tiruchelvam is director, research at Religare Capital Markets.