Pakistan: Compelling Valuations with Room for Investment

Pakistan holds promise for 2017

Pakistan holds promise, with the impending MSCI upgrade to emerging market (EEM) (VWO) status to be implemented on June 1. The market has been flat this year, but Asha Mehta, SVP and portfolio manager at Acadian Asset Management, sees more upside opportunity from the upgrade. “Pakistan is well positioned from a fundamental perspective, and also happens to be trading at a very compelling discount as compared to frontier markets (FRN) (FM), and certainly compared to emerging,” Asha told Frontera during a recent interview.

Pakistan (PAK) was one of the best-performing markets last year. The US exchange traded Pakistani-equity tracking Global X MSCI Pakistan ETF (PAK) returned 34.4% for the year 2016, driven by:

  • strong fundamentals,
  • increasing private sector contribution, and
  • the announcement of the upgrade by MSCI which rocketed stocks over 50%

Flat so far

The market has been almost flat so far in 2017. However, Acadian sees significant flows moving into Pakistan going ahead as it is included in the MSCI emerging markets index on June 1. “Factors that should support significant fund flow into this soon-to-be-emerging market are:

  • Passive investors moving into the market
  • A majority of the emerging investors have not already allocated into Pakistan. So, there’s more room for investments from passive emerging market fund managers
  • Active investors too should find the market attractive from a fundamental perspective,” said Asha.

Why Acadian’s view is bullish on Pakistan?

Acadian sees the broad market in Pakistan to be attractive. The broader themes driving the market being:

  1. Attractive valuations. Pakistani equity is cheaper than other emerging markets. Earnings are on the rise, while the price is still low.
  2. Infrastructure is a compelling investment thesis in Pakistan currently, supported by domestic drivers as well as China investment.
  3. Utilities and refineries in Pakistan also seem to offer opportunity
  4. Recent political stability
  5. Policies that have enabled the retail sector to have a higher growth profile
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