It Took a 25% Rout, But Foreigners Return to Pakistan Stocks

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  • Market cheap enough to compensate for devaluation risk: Exotix
  • KSE100 Index could double over next two years: Tundra Fonder

After losing a quarter of its value in five months as the prime minister was ousted over corruption charges and the current-account deficit ballooned, Pakistan’s stock market is starting to look cheap to foreign funds.

The market is definitely oversold and it’s a good time to buy, said Mohammed Ali Hussain, a senior analyst in Dubai at Frontier Investment Management Partners Ltd. The shares have now fallen enough to compensate for the risk of a rupee devaluation and look attractive “across the board,” according to Hasnain Malik, head of equities research at Exotix Partners LLP in Dubai.

Beset by political turmoil and an increasingly precarious macroeconomic position, Pakistan has seen $402 million of stocks outflows this year even as the country was restored to emerging-market status by index provider MSCI Inc. But with an economy supported by Chinese President Xi Jinping’s “One Belt One Road” infrastructure push and average valuations that have fallen to around half the level of Indian shares, sentiment is turning.

“Foreigners are not as bearish anymore,” said Mohammad Sohail, the chief executive officer at Topline Securities Pakistan Ltd. in Karachi. “The majority of foreigners think the market has fallen too much” and are either finding value right now or are waiting for a rupee devaluation, he said.

The benchmark KSE100 Index, which plunged 25 percent from a high in late May through Oct. 13, fell 0.3 percent at 10:51 a.m. local time Monday, after gaining 5.6 percent last week. The gauge’s 12-month price-to-earnings ratio is 8.6, compared with 12.8 for the MSCI Emerging Markets Index. That’s helping to lure back foreigners, who have bought a net $54 million of Pakistan stocks since the start of September after being net sellers for nine of the previous 10 months.

Pakistan’s current-account deficit more than doubled to $12.1 billion in the year through June and its foreign-exchange reserves have fallen 15 percent to $19.8 billion so far in 2017, fueling speculation the nation will need to devalue the rupee.

Current valuations of Pakistan stocks arguably already reflect expectations for a devaluation over the next year, Exotix’s Malik said in a note last week. Although it’s unlikely in the near term as the ruling party is focused on survival and the election in 2018, he said.

Nawaz Sharif was forced to step down as prime minister in July after an investigation found disparity between his family’s wealth and his known sources of income. Shahid Khaqan Abbasi, a Sharif loyalist, has taken over until the government’s five-year term ends in May.

Frontier Investment’s Hussain said political risks had been a “bit overblown.” He said he liked Maple Leaf Cement Factory Ltd. and Pak Elektron Ltd., as well as banks, energy and pharmaceutical companies. Tundra Fonder AB Vice Chief Investment Officer Shamoon Tariq said the benchmark index has the potential to almost double to 80,000 over the next two years.

“We are at the bottom from every perspective,’’ said Stockholm-based Tariq. “Law and order has improved a lot and the energy shortfall crisis is almost resolved after decades. Now the only thing left is a smooth election next year.”

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