Pakistan is value investor's mkt; India a classic growth story: Chris Wood

Imran Khan – led Pakistan Tehreek-e-Insaf's (PTI) victory in the recently concluded general elections could see the country getting a bailout package from the International Monetary Fund (IMF), writes Christopher Wood, managing director, equity strategist at CLSA in his weekly note GREED & fear.

An IMF bailout however, Wood cautions, has political implications given Pakistan’s role in recent years as the major guinea pig, or laboratory experiment, for China’s 'Belt and Road Initiative'. 

“An IMF bailout now seemingly beckons in Pakistan. The obvious problem is that the fiscal straightjacket implied by such a bailout conflicts with the populist agenda of the new government which, aside from the anti-corruption theme, contains much talk of building a Pakistan welfare state. An IMF plan would likely involve restrictions on borrowing and spending which could force a cut back in the Belt and Road programme,” he says.

Within the emerging markets, Wood finds Pakistan's equity market attractive and plans to add more stocks from the country in his portfolio going ahead.

“Pakistani stock market valuation is about half the valuation of neighbouring India albeit with a much higher dividend yield. Pakistan is much more a value investor’s market whereas India remains the classic growth investor story in emerging markets,” he says.

The Indian benchmarks, the S&P BSE Sensex and the Nifty50, have rallied around 9 per cent and 7 per cent respectively thus far in calendar year 2018 (CY18), outperforming Pakistan's key stock market index, the KSE100, that has gained 4.6 per cent during this period to around 42,330 levels, data shows.

Over the past one year as well, the Indian benchmarks have outperformed KSE100 by rising 16.6 per cent as compared to a 10.1 per cent fall in the KSE100.

From a monetary policy prospective, the State Bank of Pakistan has begun this year a long overdue tightening, raising rates by 175bp since January to 7.5%.

“With fiscal tightening beckoning, all this means that growth will slow but the question is by how much. Still, it would seem a certain amount of this has been discounted in the stock market. GREED & fear sees no reason for now to remove the allocation to Pakistan in the Asia Pacific ex-Japan relative-return portfolio based on the election result and will be looking to add on further weakness, be it currency and/or stock market related,” Wood says.

The risk, he cautions, is that Pakistan becomes a casualty of US-China tensions though such tensions also create the opportunity for the new government to play both sides off against each other.