Pakistani Stocks Beat BRIC Shares in 1999-2009

Karachi shares market significantly outperformed Mumbai in the last ten years. But this fact is not enough to get any positive attention from Fareed Zakaria, India's best-known cheerleader in the West.

As expected, Fareed Zakaria's discussion of "The Rise of the Rest" sings praises of the BRIC nations, particularly mentioning his native India in the most glowing terms. There is nothing wrong with that, except that Zakaria omits any positive mention of India's neighbor Pakistan in the context of economic performance in the decade of 1999-2009, and chooses to strike familiar themes of "Islamic jihadists" and "terrorism" when he does make any references to Pakistan.

What Zakaria has omitted is the story of the extraordinary returns Pakistan has produced for investors. Pakistan's key share index KSE-100 was just over 1000 points at the end of 1999, and it closed at over 9727.40 on Dec 31, 2009. Pakistan rupee remained quite stable at 60 rupees to a US dollar until 2008, slipping only recently to about 80 rupees to a dollar. In spite of the currency decline, Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms. During the same period of 1999-2009, Mumbai Sensex index moved from just over 5000 points to close at 17,464.81. If you had invested $100 in KSE-100 stocks on Dec. 31, 1999, you'd have over $900 today, while $100 invested in the Mumbai's Sensex stocks would be worth $274. Investment of $100 in emerging-market stocks in general on Dec. 31, 1999, would get you about $262 today, while $100 invested in the S&P500 would be worth $91.

Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms, in a year that also saw the South Asian nation wracked by increased violence and its state institutions described by various media talking heads as being on the verge of collapse. Even more surprising is the whopping 825% increase in KSE-100 from 1999 to 2009, which makes it a significantly better performer than the BRIC nations. BRIC darling China has actually underperformed its peers, rising only 150 percent compared with energy-rich Brazil (520 percent) and Russia (326 percent) or well-regulated India (274 percent), which some investors see as a safer and more diverse bet compared with the Chinese equity market, which is dominated by bank stocks. This is the kind of performance that has got the attention of some of the top investors and investment firms around the world.

Unlike Zakaria and his fellow media Indophiles in the West, however, the smart investors are paying attention to the outsized returns produced by the Karachi Stock Exchange listed companies. Not only has Goldman Sachs reaffirmed Pakistan's place on the list of its top 15 emerging economies for 2010, smart international investment gurus are investing in Pakistan. For example, Mark Mobius of Franklin Templeton International Funds recently said he is "overweight compared with everyone else" in Pakistani stocks.

In late 2008, Pakistan asked for IMF's help in recovering from a severe economic crisis resulting from political turmoil and a balance of payment crisis. The Letter of Intent that Pakistan's PPP-led government signed with the IMF for the $7.6 billion bailout acknowledged that Pakistan's GDP jumped "from $60 billion in 2000-01 to $170 billion in 2007-08 with per capita income rising from under $500 to over $1000". The LOI with IMF also acknowledged that "Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October (2008)."

Pakistan's KSE-100 shares trade well below the price-earnings of Mumbai or Shanghai, and its KSE's market cap is only a fraction Pakistan's GDP, which is a healthy sign for future increase in valuation. By contrast, the Indian stock market capitalization already exceeds India's total GDP. That's the sign of a bubble that can not be sustained for long.

Lower current valuation relative to BRIC markets means that there is greater potential for growth and higher returns on investments in Pakistan in the future. That's what many smart professional investment firms such as Franklin-Templeton and Goldman Sachs are expecting by being bullish on Pakistan.

Pakistan has defied low expectations repeatedly in the past. Let me quote what Mark Bendeich of Reuters wrote on Jan 10, 2008:

"A little more than six years ago, immediately after the Sept. 11 attacks on U.S. cities, few sane investment advisers would have recommended Pakistani stocks.
They should have. Their clients could have made a fortune. Since 2001, the nuclear-armed South Asian country, blamed for spawning generations of Islamic militants and threatening global security, has been making millionaires like newly minted coins.
As Western governments have fretted about Pakistan's nuclear weapons falling into the hands of militants, the Karachi Stock Exchange's main share index has risen more than 10-fold."

Pakistan is just too big to fail. In spite of all of the serious problems it faces today, I remain optimistic that country will not only survive but thrive in the coming decades. With a fairly large educated urban middle class, vibrant media, active civil society, assertive judiciary, many philanthropic organizations, and a spirit of entrepreneurship, the nation has the necessary ingredients to overcome its current difficulties to build a strong economy and a democratic government accountable to its people.

Related Links:

Is Pakistan Too Big to Fail?

India and Pakistan Contrasted 2010

Goldman, Franklin-Templeton Bullish on Pakistan

The Rise of the Rest by Fareed Zakaria

Why Colombia's Stock Market Beat China's?

Goldman Sachs "Next 11"

Emerging Markets Expert Investing in Pakistan

Who Are the Next 11?

GS Next 11 and Pakistan in 2050

Karachi Stock Exchange

Pakistan FDI Survey Report 2009

Emerging Markets: Brazil, China---and Pakistan?

Templeton's Asian Growth Fund

Pakistan Economic Survey 2008-2009

Pakistan's Infrastructure

Karachi Fashion Week

Is Pakistan Too Big to Fail?

How To Invest in Pakistan?

Karachi Fashion Week Goes Bolder

More Pictures From Karachi Fashion Week 2009

Pakistan's Foreign Visitors Pleasantly Surprised

Start-ups Drive a Boom in Pakistan

Pakistan Conducting Research in Antarctica

Pakistan's Multi-billion Dollar IT Industry

Pakistan's Telecom Boom

Pakistan Telecom Sector Investment Prospects

ITU Internet Data

Eleven Days in Karachi

Pakistani Entrepreneurs in Silicon Valley

Musharraf's Economic Legacy

Infrastructure and Real Estate Development in Pakistan

Pakistan's International Rankings

Foreign Direct Investments in Pakistan 1999-2009

Pakistan's Financial Services Sector

Assessing Pakistan Army Capabilities

Pakistan's Auto Industry

Pakistan is not Falling

Jinnah's Pakistan Booms Amidst Doom and Gloom

Pakistan's Higher Education Reform

The Next 11 Emerging Economies--Euromonitor

Karachi Stock Exchange Presentation

Is KSE Poised For Major Crash?

Dalal Street Call: Keep the Faith


Unknown said…
how do other OIC nations piece into this?
Riaz Haq said…
Goldman Sachs' Jim O'Neill has reaffirmed his optimism about N-11 group of countries which includes Pakistan. Here's an excerpt from a Vancouver Sun story:

In his book, The Growth Map, O’Neill attempts to look beyond the original concept and expand on it. Hence his “Next 11”: Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam. However, O’Neill is quick to point out that not all of these countries are equally primed for investment.

This is a group of “very, very diverse countries,” he says. “On one level, I’m always quite embarrassed about the acronym N-11 because all it is ... is a phrase to describe the next 11 population countries after the BRICs, and that’s it.”

Indeed. The N-11 ranges from stalwarts of emerging-market investing, such as South Korea, Turkey, and Mexico, to countries that even the boldest investors tend to be wary of, such as Pakistan and Iran.

O’Neill posits that countries with huge populations and low gross domestic products per capita will be able to catch up to the developed world more quickly than they could have 50 or 100 years ago, as the economic centre of gravity shifts away from the West.

In order to assess countries’ capacity to generate sustainable growth, O’Neill has come up with a set of 13 variables (from education to rule of law to fiscal health to internet penetration) that combine to make what he calls a “growth environment score.” On this measure, the highest-scoring country, South Korea, tops every G8 country except one – Canada.

Read more:

Another excerpt from UAE's The National:

Mr O'Neill, as one of the world's top economists and global chairman of Goldman Sachs' asset management business, has detailed answers for all the critics, although he does concede: "Maybe I'm too proud of my creation".

He was speaking in Dubai ahead of the Goldman Sachs Asset Management conference on the Middle East and North Africa, an annual gathering designed to work out the bank's broad investment approach to the region.

Whatever the critique of the Bric concept, there is no doubt it has become one of the guiding principles of economic and financial theory of the past decade, and has helped to change the way businessmen and financiers view the world.

He recently updated the concept to take in what he calls the Next 11 or N-11 economies: Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam.

His visit took in the UAE and other GCC states, and prompted some typically down-to-earth observations on the region's potential.

"From the broad Middle East region, there are two countries that have the population size to eventually become big enough, or N-11: Egypt and Iran. Both are in our list already," he says.

"No individual GCC country could reach their potential. If you thought of the GCC collectively, then you might think of them as having Bric-like potential, but not alone."

Even the biggest GCC country, Saudi Arabia, with its population of an estimated 25 million, is not a candidate for the lists currently, mainly because it lacks the basic criterion of having an economy that is more than 1 per cent of global GDP, Mr O'Neill argues.

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