Taliban And Foreign Intelligence Agencies Both Accused of Terror Attack In Pakistan
QUETTA, PAKISTAN, DEC 10: Security officials try to disperse activists of Ahle Sunnat Wal Jamat (ASWJ) during protest demonstration against desecration of the Holy Quran, at Quetta Karachi road in Quetta on Tuesday, December 10, 2013. (Arsalan Naseer/PPI Images).

Both Army chief Raheel Sharif and Prime Minister Nawaz Sharif have described the terror attack on 9 August 2016 on a hospital in Quetta as targeting China-Pakistan-Economic-Corridor (CPEC). A Taliban splinter group and foreign intelligence agencies have both been accused. The Easter bomb attack on Christians in Lahore and, the sporadic attacks in Khyber Pakhtunkhwa province are still fresh in the minds of many. Whoever is behind these attacks matters less from an investor’s point of view than the demonstration that although urban law and order, particularly in Karachi (over 20mn population), is much improved, the terror threat can never be wholly eliminated. This holds true for Pakistan as well as many of its Frontier peers.

Another Large-Scale Protest

Opposition led with the Pakistan Awami Tehrik (PAT) and Pakistan Tehreek-e-Insaf (PTI) political parties kicked off this week on the issue of the Prime Minister’s alleged control of all accountability mechanisms. The difference with the last mass protests in 2014 is the other major opposition party, the Pakistan Peoples Party (PPP), is taking, publicly, a supportive view. However, they are not yet actively joining the protests. The similarity with 2014 is that although mainstream media may again underestimate the level of mass support, the only voice that really counts here is that of the Army and it is not clear that a destabilization of the current Prime Minister, over whom it has exerted superiority on the policies dearest to them, is in its interests.

We Remain Positive on Pakistan Overall

We argue for a positive overall investment case:

(1) Better security led by the Army (so far in this year civilian deaths related to terror are down 40% y-o-y) should lead to better political governance in the medium term (this trumps all other issues because it is essential for better collection of taxes and utility bill payments, the root causes of persistent fiscal deficits, lack of structural reform and sub-optimal growth)

(2) Relatively low oil prices

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(3) China investment related to CPEC

(4) MSCI EM reclassification should be beneficial in terms of funds inflow but has no bearing on fundamentals

The investment risks we identify are:

(1) A populist shift in economic policy prior to the 2018 election

(2) The absence of structural reform in loss-making, state-owned enterprises

(3) High government guaranteed returns embedded in new infrastructure projects

(4) Potential disruption to the civilian PMLN government should the Panama Papers scandal unite civilian opposition and the Army against the Sharif family

(5) Any wavering in China’s commitment and ability to finance CPEC

The KSE100 index is up 7% in US$ total return terms in the last year and is on trailing P/B of 1.8x (5y range 1.3x-2.0x), ROE of 18%, P/E 11x (5y range 7x-12x). Our top picks are UBL in Banks, Maple Leaf in Cement, K-Electric in Utilities, and PPL in Oil & Gas

Hasnain Malik is head of frontier markets equity strategy for MENA and South Asia at Exotix Partners

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