An Emerging Pakistan

Ali Hussain
JS Investment Bank Group
 Outline
History
Frontier Markets vs. Emerging Markets
Downsides of EM status for Pakistan
Sector Review
Future
Conclusion
History
Pakistan stock market incidents freezing of
foreign exchange accounts in 1998 and liquidity
crunch in 2005
Market fell 55% in the last 5 months leading up to
closure in August 2008
August 20, 2008: Government declared a floor
Strongest performing market among FM countries
Recent growth and improving liquidity in
equity market
Qatar and UAE upgraded to EM Index in 2014
Positive at pre-implementation
Declined 40% from 2014-2016
Liquidity tailed off
Trading volumes of first 5 months of 2016
less than half those in 2014
Governance concerns, Low weight in EM
and drop in oil prices
Frontier Markets vs. Emerging Markets

Frontier Markets
Countries in early stage of economic development Less trading information available and trading
Lower markets caps than EM and generally very operating hours are less
illiquid Trading occurs in blocks hard to measure
Investment holdings in this sector are liquidity
typically illiquid, nontransparent and subject to very Few stocks are covered by more than two or
low regulation levels as well as high transaction
three analysts less information available
fees.
Least number of investors and investment holdings
Lower liquidity means investors are not making
investments as soon as companies make
Sometimes countries dont even have stock markets
announcements
Lucrative sectors: financial, telecommunications
and consumer companies Larger frontier market countries export
petroleum, lower oil prices are a negative for
Tend to have extreme-grade risk and lower-grade
volatility (albeit still high)
their economy whereas higher prices are a
positive
Risks: Political and currency
Since many frontier markets are heavily
2% of global market capitalization (very small)
dependent on natural resources, their
Returns not based or correlated with rest of global
economies often rise and fall with price gains or
economy
drops
Frontier Markets vs. Emerging Markets

Emerging Markets
Previous name: Less Economically Developed
Countries (LEDCS)
Emerging markets generally have high-grade
risk and high-grade volatility
Greater liquidity, higher GDP, stability and
better accessibility than FM
But once matured, EM fails to provide
diversification
Many or the larger emerging markets in
the Russell Emerging Markets index are oil
importers, so they benefit from falling oil
prices and suffer when prices rise.
Generally less vulnerable to commodity
fluctuations since their economies are
more diversified and, therefore, more
closely aligned with the consumer and
financial sectors
Valuating liquidity is not as big of an issue
as it is in FM
Equities are analyzed by numerous
analysts so more information is available
EMs are institutionalized unlike FMs
Additional sources of volatility because
more international investors have capital
at stake
Global risk aversion resulting from policy
announcements from the Federal Reserve
System would likely have an impact on
emerging markets.
 Downsides of EM status for Pakistan
Financial Integration
Once integrated fully with global markets, Pakistan will be vulnerable to swings in global growth (2008 financial
crisis)
KSE-100 index closed in 2011 at a fall of 3.7% where as Japan and Chinas index's closed at 14% and 18%
US Interest Rate Cycle
Pakistan was previously immune to the cycle
Foreign investors shop in countries without these cycles
Stock markets linked with the global financial system are affected negatively every time there is an increase
in US federal funds rate (March 2017 increase announcement)
Rise in US federal funds rates leads to foreign outflows from PSX
Domestic vs. Foreign Investors
Pakistani and foreign investors may look at different factors while investing
Foreign investors consider rising fiscal debit, high public debit and current account deficit
If the current account continues to go downhill, foreign investors may launch an attack on the Rupee
Domestic investors prefer depreciated rupee - positive effect on exports
Foreign investors prefer appreciated or stable rupee returns are not diluted by depreciation
KSE-100 Index shed 8% due to the Panama Papers case
Domestic investors might be pre-occupied with domestic politics
Over half a billion dollars worth of stock sold by foreign investors since June 2016 when EM status was
announced
During this time current account deficit was rising, public borrowing increased and circular debt
reemerged
 Sector Review
Sector Growth Statistics (FY
2016-2017) Overview
Mining and quarrying 7.4% Demand for housing rising
Industrial 7.7% in both public and private
Better energy supply and planned demand for cement and
investment under CPEC
iron
Manufacturing 6.1%
LSM 5.9% Improved energy
Small and household availability, better law and
manufacturing 8.2% order, lower interest rates
Construction 13.3% with subdued inflation and
Electricity, generation and gas continued macro-economic
distribution 12.5% stabilization is the key to
Agriculture 3.5% industrial growth
 Future
Protectionism
Pakistan economy not as trade
dependent as other Asian countries
Pharmaceutical industry heavily
reliant on exports could have
negative implications
Very liberal import policy exports
will suffer import bill will continue
to increase
GDP has major contributions from
exports and remittances
Foreign investment significant and
needs to grow
Local industry needs to improve cost
efficiencies and quality to compete
Lucrative Sectors
Large market base and growing
middle class consumer goods
sector will prosper
Export oriented businesses will
suffer because of competition
CPEC better infrastructure more
employment
Future of cement, steel, bulk
chemicals, consumer durables, and
the power sector looking bright
Major gains in the service industry,
construction sector and the auto
industry with global players also
entering the Pakistani market