- In the ‘Best Hidden’ Frontier Market, a Boom Signals a Pakistan Revival
- KSE — rewarding patience and confidence
One marvels at the feats of the Karachi Stock Exchange (Pakistan’s main stock market) over the past five years. Pakistan’s main benchmark index KSE 100 has risen from 10,000 to 35,000 points (an absolute return of 250%).
Let us rewind 5 years to 2010 – the country’s worst performing government in living memory was in power which broke all records of corruption and bad governance, terrorism had taken roots within the country like never before, this was the year when Pakistan saw its worst flooding (this will happen again as Pakistan never learns) and so on — overall things were at an absolute low. A rational investor would be crazy to invest in any asset linked to Pakistan in 2010 let alone Pakistani stocks.
So, what has changed since 2010?
ELECTIONS 2013 – Ending 2010 – political activity in preparation for the elections intensified. A key moment of glory was the shocker that Pakistan Tehreek-e-Insaf (PTI) delivered on October 30, 2011. Remember that one? Today PTI is on a path of self-destruction by actively recruiting well-known old goons of Pakistani politics (a different subject altogether). What that rally represented was hunger… hunger for change… hunger for progress… hunger for justice at every level and of every dimension (no time to explain). Rest is history, Pakistan saw an extremely mismanaged election in 2013 which at least dislodged the most corrupt government of all times at the center and replaced it with… well less corrupt, but still corrupt… I don’t know what to call them. In the provincial setup, PTI took hold of KPK (governance of that province will be a key determinant of the next election result for PTI), Punjab, Baluchistan, Kashmir, and Tribal Areas went to the usual suspects. People of Sindh were stuck with the previous government of PPP and MQM (oh the luck of Sindh). People of Pakistan got something slightly better (only slightly) than the previous setup.
Appointment of General Raheel Sharif on 29 November 2013 as Chief of Army Staff of Pakistan Army – In Pakistan, the only close to functioning institution left is probably the Pakistani Army. Give that institution a competent Chief and wonders happen. It is widely understood that the focused campaign against terrorism of all kinds, be it economic, political, or religious is coming from the desk of the Army Chief. The army which was losing popularity till the appointment of Raheel Sharif has once again proved that it is probably the only functioning institution this country has. Pakistanis are an emotional people and given the army’s recent performance many want the whole country handed over to the Army. READ: Pakistan’s Kemalist moment
Peshawar School Massacre 16 December 2014 – The tragedy of this incident was simply indescribable. This was a wake-up call and (thankfully) a turning point in Pakistan’s security situation. It is only after this tragedy that Pakistan united in one-voice against all forms of terrorism. That unity remains strong and support for Operation Zarb-e-Azb is ironclad.
Sindh Rangers Operation – Karachi, which is also the economic hub of Pakistan, has always been a victim of intense violence and corruption. Two parties, namely MQM and PPP, have covertly and overtly backed illegal activities. The Sindh Rangers have initiated a campaign to separate the criminal elements within the ranks of the two parties. Today is July 07, 2015 and this is an ongoing situation. Sindh Government has reluctantly extended Rangers mandate for 30 days (and confined them to Karachi). This is a negative development and it remains to be seen what comes next. A popular view is for the center to impose Governor’s rule in the province and ensure the Rangers operation meets its logical end.
China–Pakistan Economic Corridor (CPEC) – This is a $46 billion investment in Pakistan’s road network and power sector by China. It is expected to link China and Central-Asia to the warm waters of the Arabian Sea. If executed as planned the project will bring huge dividends to both China and Pakistan.
Let us now come back to the KSE. One thing amazing about Pakistani Stocks is that they are always cheap from a fundamental numbers standpoint. If one went with earnings (growth), then the market has been screaming BUY BUY BUY. That is still the case today, even after such a sustained rally in the past five years. The issue is that Pakistan is an extremely volatile country and security prices tend to remain below their fundamental value. This was true in 2010 and remains true in 2015.
What is different in 2015 is that the macro-economic, political, and security indicators have never been so good. Given that prices are yet to achieve fundamental value – and that the macro indicators if not positive, they are certainly heading that way, the market should be set to create ever more wealth. If one observes carefully, the rally of the past five years is just a start. If the country remains politically stable, corruption is kept under check and the security situation keeps improving, expect KSE to reach unimaginable highs in the next five years.
A rational investor was right to stay away from the market 5 years back owing to the macro-economic outlook and political situation. However, in 2015, rationale is to invest. Macro-economic and political situation is constantly improving and even after the sustained rally of the past five years stocks remain cheap.
THE SAME RATIONALE THAT KEPT INVESTORS AWAY IN 2010 IS TELLING THEM TO INVEST IN 2015. THERE IS NO NEED FOR MUCH FAITH THIS TIME. JUST LOGIC!
Note: Stock Market performance is no indicator of socioeconomic well-being. Pakistan remains one of the most corrupt countries in the world, where most of the population is unable to read or write, has no access to clean drinking water, sanitation, and most of all JUSTICE. “Pakistan can survive, but not without fundamental and sustained structural change.” If this does not happen KSE will be an amazing story of hope and faith which never materialized. READ: Quo vadis, Pakistan?