Sweden’s Tundra Fonder launched its Pakistan fund in late 2011. This year net monthly flows are starting to pick up pace along with the country’s improving sentiment among international investors, says portfolio manager and partner Johan Elmquist.
It is of course early days as far as such improvements go. Elmquist has no statistics to indicate the level of optimism in the Pakistani market itself, but says discussions with those involved in trade issues suggests that trade between the country and its neighbour could triple over the next couple of years. Pakistan is also set to benefit from an electricity delivery contract with India, which will go some way to ameliorating the poor infrastructure currently.
Elmquist is also positive on the prospects of future returns from the market because of the current level of valuations placed on it.
“There are risks in Pakistan. But we think the financial market is exaggerating the risks compared to the risks in India. It is a relative valuation play. Pakistan is valued at one third of the valuation of India on price earnings and about one fourth on dividend yields. That is not reasonable. Over time we think the gap will get closer. A 50% discount on PE to India leaves Pakistan with a 50% upside potential”
India’s advantage in the past decade has been the level of foreign direct investment. Investors stayed away from Pakistan because of factors such as its political situation. One measure of the impact is the size of Tundra’s fund against the average daily stock market turnover. Currently at around $80m-$100m daily, it is some 80% down on the $500m daily average seen in 2007. That is because foreign investors left Pakistan, Elmquist says.
That situation is now reversing, which explains the ongoing performance of the local market, which is yielding around 8%. Tracking the foreign investor impact is relatively straightforward. Pakistan’s stock market operates rules similar to those elsewhere such as Turkey, which means foreign investors face a considerable barrage of administration in order to obtain a trading account. That enables the exchange to keep track or who owns what, and results in weekly documentation outlining what foreign investors have bought and sold.
Some of the improving FDI into Pakistan may also be coming from wealthy Pakistanis themselves, who are recycling offshore money, often from banks in Dubai, back into the country, although obtaining figures on this activity is far harder to come by.
|Tundra’s monthly note for April, published in early May, said that key factors affecting short term market development included: whether the country would go to early elections in the wake of prime minster Yousaf Raza Gilani being found guilty of contempt of court; the strength of continued FDI; and further improvements in quarterly results of listed companies.|