Pakistan Strategy: ASEAN Conference; Pakistan remains a ‘discovery’ trade – KASB Research
By: KASB Securities and Economics Research
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Road show & ASEAN conference takeaways
We have just returned from a Pakistan road show timed alongside BofAML ASEAN conference in Singapore last week where we showcased select Pakistan corporates. The #1 takeaway from the trip from our vantage point is that Pakistan remains a ‘discovery’ trade. Most investors without looking at Pakistan carry very low expectations given negative headlines in world press. Hence any event that triggers a cursory look at Pakistan from new investors elicits generally positive response and increased interest for Pakistan equity markets.
1. KSE’s stellar 2012 report card has increased visibility
The best thing to have happened to Pakistan in recent years is ~49% returns of the benchmark KSE-100 index last year (trumping peers, refer graph inside), as it ignited interest and got a new set of investors interested in KSE and its dynamics.
2. Growing frontier funds are a boon for Pak
Adding to the advantage garnered by the impressive performance is the growing number of frontier funds where Pakistan’s ~4% weight in MSCI FM makes it almost obligatory for these funds to understand the Pakistan story. Add to it the aversion of some of these funds to GCC markets (~54% of MSCI FM) which makes the importance of markets like Nigeria and Pakistan much higher.
3. Pak currency woes are not C/A driven surprises investors
Also strengthening our view of Pak being a discovery trade were questions we received over the currency, where majority investors assume Pak currency pressures are driven by current account. Understanding of the pressures being driven mostly by pending IMF payments and Pak’s geopolitical importance paving the way for a relatively smooth new program with IMF (despite slower reforms) alters the medium term outlook of the currency for investors, in our view.
4. Resilient business models stand out…
Another positive factor for first time investors is quality of Pakistan corporates and resilient business models. Most investors we met shared the view that years of political and uneconomic uncertainty have battle-hardened Pakistan corporates and led to resilient business models which defy some of the macro stress.
5. …grey economy provides a further leg up
Another source of disconnect between macros and corporate profits is element of unreported economy. While the same is a concern for tax collection and reforms, int’l investors appreciate the contribution this has towards domestic demand stocks (food, cement etc). Somewhat ironic that during the conference days, a Singapore newspaper ran a story on Pak domestic demand discussing the launch and popularity of brands like Debenhams, Carrefour and Fat Burger.