ISLAMABAD: Foreign investors are heading to Pakistan to benefit from a newly elected government that has rolled out a programme to aid the struggling economy.
The benchmark index in the financial capital Karachi jumped 49.4 percent last year, ranking as one of the world’s top performers. The market jumped another 2.8 percent Thursday, the first trading day of 2014, said the Wall Street Journal (WSJ) in an article published on Friday.
The catalyst in Pakistan was the election in May of the Pakistan Muslim League, led by Nawaz Sharif, a business-friendly politician. It was the first time in the nation’s history that an elected government had handed over power to another, raising expectations for improved political stability.
Flows from foreign investors into Pakistan reached $283 million from the beginning of May, the month of the election, to the end of 2013, according to the National Clearing Company of Pakistan.
Global investors have also snapped up Pakistani government bonds with yields, which move inversely to prices, falling to 7.54 percent recently from as high as 11.69 percent in April on the 10-year bond. In a further sign of growing confidence, the government said last month it is also aiming to sell billions of rupee debt aimed at the Pakistani diaspora.
A spokesman for the finance ministry said there is currently no specific time frame on the issuance of the bonds.
The optimism stems from the government paying off $5 billion in debt that was weighing on the energy sector, freeing up funds at fuel importers and power producers and distributors.
The country also agreed to a long-term bailout loan of at least $6.6 billion from the International Monetary Fund to avoid a potential balance of payments crisis.
The government has in addition announced a far-reaching privatization program, which will include the national airline and electricity producers.
The energy move was important given the country is plagued by electricity shortages, while the oil and gas sector accounts for nearly a third of the benchmark index in Karachi. The largest company on the index, energy firm Oil and Gas Development Co rose 43.5 percent last year.
“Given that the general impression of the new government has been corporate friendly that is a very strong factor that made people more optimistic about Pakistan,” said Mattias Martinsson, chief investment officer and partner at fund company Tundra Fonder in Stockholm, which runs a $30 million Pakistan fund. Political stability now is encouraging more investors to focus on the country whose population of around 180 million makes it the sixth most populous country in the world and a potential draw for those betting on rising incomes and more consumers spending. The market remains cheap even after the strong run-up earlier this year-currently trading at over nine times trailing 12 month earnings-a common valuation measure used by stock analysts.
“Pakistan has a fairly diverse economy with a large and young population that needs to be fed and supplied basic infrastructure such as electricity,” said Caglar Somek, global portfolio manager at Caravel Management in New York, which manages around $650 million. “If you find the companies that supply those basic needs, growing at double digit with high profitability, you can buy them at valuations that are on average 30 percent to 40 percent cheaper than their emerging market peers,” said Somek.
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