Pakistan politics

With the democratically elected government finally winning back vote of confidence and support from the ongoing joint sessions of parliament, aided with Pakistan military clear support for upholding democracy led to KSE100 gaining 766 points (or 3%) to reach at 29,260 levels by September 2, 2014, since the sit-ins began. And what's more at P/E of 7.3x, it stills trade at an attractive 47% discount to regional markets, and offering a 6.8% dividend yield compared to region dividend yield of 2.6%. What it tells about today's investors is that they firstly do not see Pakistan democratic transition to be as fragile as one would have thought, their trust in government led policies and to a larger extent the recent development on country's macro-economic front, ensuring positive fundamentals remain rather intact in long-run. Apart from a few reforms that still needs a clear policy break-out; the PML-N government has made some laudable developments on economic front.
These include:
-- Significant build-up in foreign exchange reserves reaching USD ~15bn by Jun- 14 end from ~8bn back in January-14
-- Subsequently leading to a 5% PKR appreciation, from its peak
-- Timely execution of 3G/4G Spectrum auction generating total revenue of USD 1.2bn (0.5% of the GDP)
-- Successful issuance of Eurobond amounting to USD 2.0bn
-- Privatisation of public held stake in UBL (USD 387mn) and PPL(USD 155mn)
-- Lowered corporate tax from 35% to current 33% and co-currently bringing it to 30% by 2018, and
-- Attracted higher foreign investor participation (net inflow of USD 572mn since election compared to USD ~382mn in preceding government 5 year tenure)
-- Progression towards structural reforms in power sector with increase in power tariff and working towards a sustainable solution with lowering generation cost by encouraging coal based power generation.
-- Inflation as measured Consumer Price Index (CPI) has remained mellow showing a 7.0% year-on-year rise during the month of August. For FY15, State Bank of Pakistan and IMF projects inflation to remain under control at 8.0% on average, which if not very low, but is around sustainable levels.
-- Similarly, worker's remitted about USD 1.6mn during the month, highest received in any given month.
In addition, recent disbursement of USD 371mn under the Coalition Support Fund (CSF) reassures foreign support for a stable and democratic Pakistan. To bring another perspective on it, during the month of August, foreign investors bought around USD 177mn worth of equity compared to selling of USD 142mn. This shows that despite all the political drama foreign investors remained net buyers of Pakistan equities, worth USD 35mn during the month. Local investors on the face of it were a net seller during the month. However, a closer inception suggests the other way around. Mutual Funds were the biggest seller during the month due to their redemption needs. But at the same time, almost all of what Mutual Fund sold about USD 160 million was in fact bought by banks/NBFCs, where their combined buy amounted to USD 142 million. This equity changing hands from one party to another much bigger and powerful, tells a rather much improved story for Pakistan equity market.
Henceforth given strong macros, healthy corporate profitability, continued interest from the foreigners, investors' can finally take solace in the fact that the time has come to reap the rewards for their patience in staying put during the political fiasco and treating it as the brief shower that it was. Stock prices have already started recovering and it would be the best time for potential investors to buck the trend and make the most of the foreseeable revival.
(The writer is an analyst at Arif Habib Limited)