Syed Ali Kashif, MBA Class of 1996, after graduating from IBA joined banking sector, where he worked his way up from management trainee officer, to the position of Head of Export Refinance at one of the top-of-the-line Bank. In 2014, he joined a leading business house where he currently spearheads the Treasury Research. His areas of interest in Banking are Treasury & Funds Management, Investment Banking, Corporate Banking, SME Banking, Project Financing, SBP Export Refinance and Islamic Banking. As MBA professional from IBA, and as a keen professionally qualified senior banker, the exposure he accrued in banking lends him credence in the immense market potential of financial sector of Pakistan. This forms the underpinnings for his present preoccupation in financial research translating him into a prolific writer who has been chipping in with his insightful write-ups to the IBA Alumni e-Newsletter ever since it was initiated.
Even today the country continues to witness growth spurts with substantive investment and capitalcoming in followed by period’s recession. With each year the Federal Board of Revenue lagging farbehind the revenue targets and the government had to rely on the borrowings from IMF and otherdonors besides investments flows without which our capital structure cannot be constructed, andeconomy of Pakistan cannot be managed.
Coming to the topic of our article that is “Invest in Pakistan since it is an emerging market.”
We will first look at what are “emerging markets”? The term “emerging markets” was first coined in thelate 1980s in response to the phenomena of emergence of markets on an international scale in thedeveloping areas of the World with countries like Africa, South America, Asia, Indies and Eastern Europe.These markets are not necessarily be “emerged” from the scratch but have gained attention of theinternational investors’ resultant of their experiencing rapid growth and change with the aspect ofrestructuring of underlying economies attached prominently to it. Take the example of Malaysianmarket which dates back to 1930. The Mexican market witnessed its inception in 1894. Conversely, theTaiwanese market started its operations in 1961, and the Thai market saw its inauguration in 1975.Pakistan Stock Exchange Limited (PSX) (formerly: Karachi Stock Exchange (Guarantee) Limited (KSE) wasestablished on September 18, 1947. It was incorporated on March 10, 1949. Only five companies wereinitially listed with a total paid-up capital of 37 million rupees.
Talking of emerging markets, they have amongst each other, different characteristics like marketcapitalization, number of listings, turnover value, degree of regulation, extent of global investments andgeographical location.
In defense of the thrust of this article, I want to pitch six reasons why the international investors fromany country should invest in Pakistan as an Emerging Market. Before those reasons start becoming viral,among those blinded by optimism, a reality check is warranted.
SPECTACULARLY HIGH RETURNS:
My first bullet-point is that the emerging market like Pakistan can offer spectacularly high returns,particularly in the early years of development as most of the scrips plow-back their earnings instead ofpaying dividends to the investors. During the stock market boom in February-March 2005, the returnyielded by some best mutual funds scrips were as high as 25% which is higher than the returns offeredby National Savings and Commercial Banks. And this also holds true for the present scenario in the stockmarket in Pakistan. However, the risk is also typically high. Therefore, the emerging markets in generaland Pakistan Stock Exchange in particular is susceptible to large fluctuations in prices, therebyincorporating high level of variance risk.
HIGH POLITICAL RISK:
My second item on my pitch is countries that meet the emerging markets criteria have a high politicalrisk. These nations are having in common, relatively large degree of political instability. Like in our countryas well, where we have seen chequered political government history in the last four decades back. As inthe last decade, our country has moved from somewhat politically instable to more of a politically stablestate of governance stature, and the last government completing its five-year tenure successfully,making it rise to a politically highly stable country status. The potential for sudden changes ingovernment and policy introduce additional risks that are not to be found in the developed globalmarkets.
SCARICITY OF INFORMATION:
The third pitch is that the information is relatively scarce. There is little known on emerging markets visà-vis companies and scrips that are traded in the bourses. Scrips do not have historical records andfinancial information that can be relied upon while making investments and hence are scarce. Thisscarcity of information makes investment in an emerging market relatively risky. The average value forPakistan during the period 1996-2013 was 684 companies with a minimum of 550 companies in 2013and a maximum of 782 companies in 1996. As of February 23, 2018, there are 559 companies listed inPSX and the total market capitalization is $84 billion. RELATIVELY LOW LEVEL OF REGULATION: Thefourth pitch is that in emerging markets, there is relativity low level of regulation. In Pakistan, the SECPis governing the affairs of stock exchanges of PSX, LSE & ISE. The SECP is acting as watchdog, givingdirections regarding operations, guidelines on legal and regulatory aspects and monitoring andpenalizing the stock market in case of any deviations from its rule’s trajectory. Reporting requirementsare not stringent on listed companies. When a company gets listed on the bourses, it is accorded withcertain privileges, incentives and exemptions.
BREADTH IN EMERGING MARKET IS SMALL:
The fifth bullet point is that for an emerging market, the breadth of the market is typically small. InPakistan, the PSX is dominated by a handful of very large and liquid shares. This group of scrips isrepresented by PSX-100 index. Trading outside these group of shares is often very limited. As of 30thJan,2020, the market capitalization of OGDC was 601.83 billion, Pakistan Tobacco was 510.73 billion,Nestle Pakistan 362.30 billion, Pakistan Petroleum 329.06 billion and MCB 252.65 billion as againstBYCO Petroleum 44.02 billion, Habib Metropolitan Bank 41.81 billion, The Searle Company Ltd 40.82billion, Abbott Laboratories Pvt Ltd 40.14 billion, Nishat Textiles Mills Pvt Ltd 39.63 billion. Comparingbetween market capitalization of BYCO Petroleum and OGDC, the BYCO is just 7.31% of OGDC marketcapitalization. Hence the liquidity risk is high once an investor moves outside the largest marketcapitalization shares.
EMERGING MARKETS ARE SUBJECTED TO RAPID CHANGE AND REFORM:
In emerging markets, the economies are under significant structural reforms. The development ofPakistan economy requires large amount of capital due to this these emerging markets attracts interestof global investors. The recent affiliation of MCSI with PSX is an example of this surging global interest inthe Pakistan’s markets. The rapid changes and much-desired reforms affect the stock market and itsvolatility depends on the degree of structural reforms in the economy. In view of the foregoing, it can beconcluded that emerging markets are a phenomenon of recent times. The term applies to countries’markets that have witnessed rapid growth together with structural reforms and is generally associatedwith developing economies. It is imperative that Pakistan offers lucrative investment opportunities in thevarious sectors of economy to the international investors because of high returns. But the fundamentalrisk-return trade-offs is also applicable to these emerging markets. So, invest in Pakistan since it is justone of the developing countries’ leading emerging markets.