Pakistan The New Hotspot For Global Investors

Some of the world’s leading asset managers are paying attention to Pakistan’s stock market following an impressive 84% return in 2024. A Bloomberg report reveals that top firms including BlackRock, Eaton Vance Corp., and others are reinvesting in Pakistan’s $50 billion market, driven by attractive valuations and a stabilizing economy. Analysts from Intermarket Securities Ltd. predict a roughly 40% gain for the main KSE-100 index this year.

Strong Investment Case Backed by Robust Earnings

New York-based portfolio manager Steven Quattry of Morgan Stanley Investment Management summed up the sentiment:

“You don’t have to stretch your imagination to make an investment case for Pakistan.”

He pointed out that the rally has been underpinned by strong earnings growth, bolstering investor confidence in the market.

Economic Boosts and Market Re-Entry

Pakistan Stock Exchange (PSX) surged last year, supported by an improved economic outlook and crucial loan agreements with the International Monetary Fund. Recent improvements in the nation’s current account balance and easing inflation have prompted the central bank to cut interest rates, further fueling market optimism.

Bloomberg noted that this renewed confidence is evident in foreign fund allocations. For instance, Pakistan’s stocks now account for a 5% weight in the BlackRock Frontiers Investment Trust a return for the money manager after a hiatus since March 2022. Similarly, Eaton Vance reentered the market in the June quarter following a brief exit.

Additional investors, including Legal & General Investment Management Ltd and Evli Fund Management Co, have also increased their holdings. Mohammed Sohail, CEO of Topline Securities Ltd, mentioned that current levels of foreign interest are comparable to the peak years of 2014-2018.

Risks and Future Outlook

Despite the strong rally, challenges persist. The political environment remains fragile, with former Prime Minister Imran Khan capable of mobilizing widespread protests even from behind bars an instability that could threaten economic activity. Additionally, Pakistan fell 6% short of its six-month tax collection target, a key condition for its $7 billion IMF loan, raising concerns about the viability of future funding tranches.

A downgrade to frontier market status by FTSE Russell in September further dented sentiment, prompting net selling by foreign investors in the final quarter of 2024. However, improvements in external finances offer a silver lining. With foreign exchange reserves now covering more than two months of imports a significant recovery from less than one month before the 2023 IMF bailout there is cautious optimism.

Ruchir Desai, a fund manager at Asia Frontier Capital Ltd in Hong Kong, summed it up:

“If Pakistan can manage its current account deficit, we can see a multi-year rally in the market.”

As global investors increasingly recognize the potential in Pakistan’s recovering economy, the market appears poised for sustained growth despite the existing challenges.