October 2008 - Looking at some of the recently highlighted investment destinations - for example, Phnom Penh or Karachi - and issues of personal safety and political risk become part of the package..
Pakistan’s position as a growth economy with no shortage of funding is usually overlooked. This is understandable because, especially in a western context, the country is beset by political turmoil. It has only recently seen one of its former leaders assassinated and it is still seen as a breeding ground for Islamic extremism and a conduit for the opium trade out of Afghanistan.
Now though, investment houses are talking about Pakistan’s relative attractions in the region. The investment case is fundamentally sound and based on Pakistan’s cheapness compared to some of its neighbours, supported by a growing economy fuelled by substantial inflows from the Middle East. It is one of the cheapest markets in Asia, with above average growth and high dividend yields. Market capitalisation to GDP ratio is one of the lowest in the world. Foreign ownership is still low, but it is increasing. Significantly, a steady increase in issuance is expected. Mark Matthews, Strategist, Merrill Lynch, explains it thus,”Pakistan offers the greatest information arbitrage in Asia - the place where perception and reality are most mismatched. It is like buying India at half the price.”
BlackRock Merrill has a 5% stake in the funds arm of the KASB Group, based in Karachi. KASB is the adviser to a new Luxembourg domiciled fund being promoted by Dalton Strategic Partnership, registered in Guernsey. The fund is a clone of an existing fund run by Faisal Potrik and the investment team from KASB Funds. The firm is well-established in Pakistan and KASB has the largest market share of any foreign brokerage on the Karachi Stock Exchange. The investment objective of the fund is to outperform KSE 30 Index.
Pakistan’s population of 160m+ makes it the 6th most populous country in the world. A young working age population with a median age of 21 years now has greater spending power. Cellular penetration has gone from 2% to around 60% currently. Per Capita income (USD 925) has doubled in the last 6 years. Demand for electric goods (TVs, ACs, Refrigerators) witnessed exponential growth over the last 5 years, capacity expansions underway now to meet future demand. Pakistan’s household debt is currently only 3.5% of GDP
Pakistan’s GDP is growing at a rate of 7% per annum and is expected to continue at this level for at least three years Growth has been led by the services sector, although manufacturing has also played its part, with capacity expansion undertaken in key industries.
Far reaching reforms have also taken place in the financial sector. Tax reform is being carried out and a programme of privatisation is likely. As in India, massive expansion is underway in infrastructure underway to facilitate future economic growth. The fund managers believe this will create a relatively open economy. The international investment community has caught on to this change, with foreign direct investment focused particularly on the banking and telecom sectors. Barclays have opened an operation in Pakistan, ABN Amro have acquired a bank and Standard Chartered also have an established presence.
The risks are various but the managers state that although political noise is likely to remain a factor, there is a democratic structure evolving. Elections in February 2008 were considered to be free and fair and have led to the formation of strong coalitions in all provinces. Like its neighbouring countries, it is encountering the problems of growth, not least the fact that double digit inflation has reared its head, caused by rising food and energy prices. However, Potrik does not believe this will destabilize the economy, with prices expected to stabilise in the medium term.
Naz Khan, CEO of the KASB Funds group in Karachi says, “Pakistan represents an attractive long term growth story for international investors. It is a populous country, so a domestically driven growth story. It has abundant energy provider, strategically positioned between energy deficient economies towards the east and energy rich economies towards the west.
And it continues to be a beneficiary of Middle East wealth and a talent pool for that sector. Investment continues to flow into the country and it will continue to do so.”
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