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MENAFN - Khaleej Times - 11/01/2017
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(MENAFN - Khaleej Times) In 2015 and early 2016, I had written at least half a dozen columns strongly recommending UAE investors understand the macro ballast behind the spectacular bull market on the Karachi stock exchange.

Pakistani equities were up 45 per cent in 2016, the best performing emerging market in Asia. Pakistan is still not expensive at 10.4 times forward earnings, still a major valuation discount to Indonesia at 15X, India at 16X and the Philippines at 18X earnings.

Ironically, foreign investors unnerved by the escalating conflict with India on the Line of Control in Kashmir, Nawaz Sharif's political woes (political joke de jour is PML-N stands for Panama money laundering network) and a sporadic privatisation programme have actually sold 250 million in Pakistani equities.

Unlike Seoul, Tokyo, Mumbai or Jakarta, Pakistani equities do not soar only when they are in favour with global investors.

The MSCI upgraded Pakistan to emerging markets from its former frontier netherworld last June. The elected government of Nawaz Sharif will complete its full term, only the second such government in Pakistani history to do so.

Former army chief General Raheel Sharif won his war against the Taliban in Swat and South Waziristan - and resisted the calls of phony "democrats" who called on the GHQ to stage a coup d'tat.

The State Bank of Pakistan's hard currency reserves have topped 20 billion.

Budget deficits, inflation and policy interest rates has plunged to record lows. The 6.7 billion IMF structural adjustment programme is on track, China has promised to invest 46 billion in its "economic corridor". Pakistan has raised more than 3 billion in eurobonds/sukuk in the international capital markets.

Pakistan equities have returned 28 per cent per annum for US dlar investors since 2011. This makes former president Asif Zardari the father of the most spectacular bull market in Asia despite his PPP's ostensibly socialist, populist agenda.

Pakistan is also weekly correlated to Wall Street or even the major emerging markets indices. I remember when a former American ambassador once told me that Pakistan was a "geopolitical too big to fail" state - to Washington, Beijing, Riyadh and even to New Delhi.

As late as December 2015, it was obvious to me that the world was grossly underweight Pakistan on the eve of a MSCI upgrade from frontier to emerging market that came in June 2016. Since the free float in Karachi is a mere 22 per cent, I did not need to be Warren Buffett to figure out that at least a 40-80 per cent move in Pakistani equities was imminent in 2016. After all, UAE shares more than doubled in value before and after their MSCI upgrade. This macro trade was, frankly, impossible to miss.

I believe it was a strategic mistake for Pakistan to sell 40 per cent of its combined stock exchange to Chinese and not Western investors. Pakistan's destiny is with the Western democracies, not as a satellite state of the Dragon Empire. There is no doubt that KSE 100 index can well rise to 6,400, though I would immediately go to cash if any religious right coalition emerges in the 2018 general election.

I believe the Kashmir time bomb will not explode into war on the LOC, even if it poisons relations between Islamabad and New Delhi.

The easy money in Pakistani equities was made in 2016 though there is no shortage of 30-50 per cent upside strategic plays in Karachi in 2017. Pakistan amply vindicates George Soros's observation. The big money is made when things go from Godawful to just plain awful.


Khaleej Times

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