Move over, India. Pakistan is the hottest equity market in South Asia

The new favourite.
The new favourite.
Image: Reuters/Akhtar Soomro
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The BRICS grouping is passe and the top emerging markets are losing sheen. Brexit has battered stocks world over and currencies across economies are weakening.

In times like these, guess what’s working for the global equity markets? Pakistan.

The south Asian nation, mostly in the news for terrorism and political violence, has beaten major Asian economies this year in stock market performance. In 2016, Pakistan’s benchmark equity index, the KSE 100, has been one of Asia’s best performing. In fact, it is the fifth-best performing stock index globally. Bloomberg even referred to Pakistan as an Asian “tiger,” in a report.

In June, the American stock index firm MSCI included the KSE 100 in its emerging markets index, which represents 10% of the world’s market capitalisation.

At the same time, the MSCI did not include China’s mainland A shares, which are traded in the local currency renminbi. One reason for this exclusion is that China’s economy hasn’t exactly been firing up, thanks to a drop in manufacturing.

Here’s how the KSE 100 compares with another index: Since the beginning of 2016, till July 11, India’s S&P 100 index has gained 6.67%, while KSE 100 is up almost 17%.

On a global level, the KSE 100 has left many indices behind. The data is as of July 11:

The rise of Pakistan’s stock markets

The Karachi Stock Exchange (KSE)—also known as the Pakistan Stock Exchange—has stood out in recent years, despite a troubled political and security environment. But not all its listed companies are traded on it—in fact, less than a fourth were actively traded in 2014. Nonetheless, improving political and financial stability is helping revive Pakistan’s stock markets.

There’s also been some support from a 2012 government amnesty programme, which allowed investors to pour money into shares until June 2014 without their source of funds being questioned. This doubled the average traded volume on the KSE.

Launched in 1988, the MSCI emerging markets index first included Pakistan in 1994. In 2002, the KSE was shut down due to a stock market crash. Six years later, in 2008, it was temporarily closed following the global financial crisis. Faced with such shutdowns, MSCI dropped Pakistan out of the emerging markets index till this year.

Over time, investors have regained confidence in the country’s equity markets.

“That’s an interesting lesson from Pakistan… You had to have a period of time where investors got comfortable with the idea that they wouldn’t close the market again,” Adrian Mowat, managing director and chief Asian and emerging market equity strategist at J P Morgan told CNBC in June.

What’s attracting investors?

Investment in infrastructure, coupled with aggressive government spending, is making Pakistani markets attractive to investors. Further stability in politics will only help.

“PSX (Pakistan Stock Exchange) is far ahead (compared to peers) in terms various performance indicators—valuations, dividend yield, corporate profitability—and has traditionally been traded at a discount to regional and emerging markets. This discount was attributable to lower growth trajectory and higher political and security risk,” said Zafar Masud, a member of the monetary policy committee and a member of the board of directors at the State Bank of Pakistan.

“There is a view that this discount will narrow, for all the right reasons,” Masud added. He said economic growth had picked up, too, with the improving security and political situation.

Meanwhile, the Chinese have announced large investments in the country. When China’s $46-billion investment to build a China-Pakistan Economic Corridor actually happens, it will boost trade and make critical infrastructure, such as power, easily available to individuals and industries alike.

Additionally, a growing middle-class is expected to fuel demand. Pakistan’s GDP grew at 4.2% in fiscal 2015; in fiscal 2016, it is expected to be 4.5%.

As Ruchir Sharma, Morgan Stanley’s head of emerging markets and chief global strategist indicates in his book, The Rise and Fall of Nations, three countries that have traditionally been economic “laggards”—Bangladesh, Sri Lanka, Pakistan—are now “contributing to the quiet rise of South Asia.”

Inflation in Pakistan has dropped below 3%, the government’s budget deficit has seen a commendable easing from 8% to 5% of the GDP, and current account deficit is now at 1% of the GDP, which Sharma calls “the safe zone.”

No wonder, its stock market is booming.