Islamabad February 2 2023: Crisis-ridden Pakistan faces daunting economic challenges that may dampen enthusiasm for the nation’s stocks among frontier-market fans, even with a recent rebound and cheap valuations.
Shares in Pakistan are at their cheapest level since at least 2009. The KSE-100 Index is trading at around 4.3 times current earnings, compared with 10.1 for the MSCI Frontier Markets, which covers 22 countries including Pakistan, Vietnam and Bangladesh. The reading for MSCI’s broader Asia gauge is 15.4.
“Even with our economic situation, a fair PE for the stock market is 5.5 times rather than 4 times,” said Amjad Waheed, chief executive officer at NBP Fund Management Ltd., which manages the equivalent of about $823 million.
The market has been riding on optimism about the nation taking steps to secure financing from the International Monetary Fund. That’s helped drive the best weekly performance since mid-2020 for the KSE-100 Index.
Overseas funds are trickling back in, with inflows reaching $9.23 million last month after $34 million left in December. Foreigners have been net sellers in all but one year since 2015, according to data compiled by Bloomberg.
Pakistan’s path out of its economic troubles, however, looks likely to be long. The IMF expects the south Asian economy to grow just 2% in the fiscal year ending June, 1.5 percentage points below an October forecast, as the nation grapples with raging inflation, supply shortages and dwindling currency reserves.
Even as global monetary authorities look set to moderate their aggressive tightening cycle, the State Bank of Pakistan raised its key rate to a 24-year high of 17% in January to tackle inflation at above 20%.
“You have to come to a point where either investors feel interest rates have peaked out or believe will start getting cut” in coming months, said Ruchir Desai, a fund manager at Asia Frontier Capital in Hong Kong. “But I don’t see that happening because inflation is still very high and will remain high, in my view, because the rupee has depreciated.”
The rupee tumbled to a record low of 270 against the dollar on Monday as authorities loosened their FX control in a bid to secure IMF funding. It has since stabilized slightly, but room for gains may be limited. Ankur Shukla, an economist at Bloomberg Economics sees fair value for the currency at around 266.
On top of all the economic challenges, the political outlook also remains uncertain after former Prime Minister Imran Khan was removed from office in a confidence vote last year, with an election expected to be held some time after August.