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Pakistan visit – JOM Fund Management

During December we visited Pakistan for the first time. Our trip covered both Lahore and Karachi, where we met 19 different companies including one site visit. In addition, we also visited State Bank of Pakistan, the country’s central bank in Karachi. Initially we had plans to visit Pakistan already in 2017, however, back then, the economy showed already some signs of overheating while the political situation had become very unstable, thus we postponed our trip. Anyway, in late 2019 when this boom-bust cycle had run its course, we thought it was time to visit this world’s 6th populous country. Pakistan is more than 2.5x the size of Finland by area, while there are around 212m people out of which more than 65% are under the age of 35 years. Therefore, we see that the Pakistani workforce will be enjoying the demographic dividend for many decades from now on. Pakistan’s GDP was 284bnUSD in 2018, while the GDP per capita was at 1390 USD. Currently, the stock market capitalisation is only around 20% of the GDP at around 50bn USD. During the bear market of the last two years until the bottom in 2019 early August, the stock market had declined in dollar terms by a massive 65% from its peak in mid-2017. Now the country’s main KSE100-index has climbed more than 40% from August, while valuation levels are still very attractive vs our other focus markets in Asia: 2020 PE is only 6.6x, dividend yield 6.4% and P/BV 1.1.

Corporate meetings during our trip were mainly focused on quality large companies, but we also met with a few sub-100mUSD market cap companies. Sector wise we covered companies from banking and insurance, to automotive industry, cement, O&G, white goods manufacturing, packaging and textile producers. In most of the cases we were positively surprised with the quality of the management, thus overall our feeling on the corporates was positive. However, there were also companies that we viewed quite negatively, thus it became quite clear what companies were better to leave out from our investment universe.

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PAEL -company’s white goods manufacturing line appeared quiet and traditional. Source: JOM

KSE100-index bottomed at the turn of August – September, after there was an astonishing drop of 65% in USD terms during a two year period. Source: Bloomberg

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KSE100 Index (USD) 2011 - today

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The popular Pakistani prime minister Imran Khan was very visible in the country’s media. Source: JOM Nearly all the discussions with corporates also touched upon the most important recent issues, such as IMF loan package, CPEK (China Pakistan Economic Corridor) infra project and Pakistan’s FATF status (Financial Action Task Force). While all these are internationally linked important projects, it is especially important that Pakistan does not fall back onto the FATF black list, while in the medium term the country should also move up from its current grey list status. Currently only Iran and North Korea are on the FATF black list. What comes to CPEK, a large part of the “brick and mortar” side of business has been completed – this includes, for example, around 2000km of motorways between the largest cities in the country. CPEK has been having especially positive effect on the development of the economy on the Northern parts of the country. State Bank of Pakistan also indicated during the meeting that CPEK will now shift onto phase two, which will bring the country’s competitiveness more in line with other similar countries. For example, this includes improving the country’s ports, enhancing business environment, as well as improving the manufacturing sector.

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The Packages Mall in Lahore is Pakistan’s largest shopping mall. There are only a few malls in Pakistan, so the shopping center boom is just starting to emerge. The lifts and escalators in the mall were Kone’s! Source: JOM

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Among cars and motor cycles, there were donkey carriages in the streets. Source. JOM The on-off Kashmir conflict with India was also mentioned a few times, as the conflict once again surfaced in August and subsequently resulted in 200% import tolls for the Pakistani products, imposed by India’s government. Pakistan has in turn retaliated by imposing tolls on Indian imports. We believe this crisis will settle soon and the import tolls will be abolished within the next few years, maximum.

JOM The security situation has improved remarkably during the last 10 years in Pakistan, but armed security men still make up a part of the street view. So Karachi is still not exactly a family friendly holiday destination. Source: JOM

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Inflation in Pakistan has recently accelerated, as multiple devaluation rounds have fed especially the import price inflation. Therefore, the interest rates have also stayed high, (currently 13.25%), which has resulted in a sluggish loan growth. According to most of the banks that we met, NPLs are not yet a problem, but if inflation and interest rates stay at elevated levels until late Q3/2020, the NLPs may rise higher and pose a risk for the banking sector in general.

Inflation was still rising in November, but this will be expected to change for the better in the early 2020. Source: Bloomberg

Pakistan’s current account balance has improved considerably this year, which has recently been noted also

by the credit rating agencies. Source: Jefferies

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Pakistan Inflation YoY % 2014-today

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Overall, we came away with positive spirits from Pakistan, despite the many problems the country is currently

going through. Clearly the best sign was that nearly all the parties with whom we discussed had a very bright

outlook for the future, strongly believing in a positive development as the current challenges are beaten

going forward. We think that the IMF package, CPEK and the popular PM Mr Khan, all can be credited for

good vibes around the business community. If this positivity continues and sentiment keeps on improving,

we also believe that Pakistan’s stock market valuation will keep on improving as it is still trading at

considerably lower multiples than many other similarly highly populated countries.

Portfolio Manager Juuso Mykkänen

pakistan visit jom fund management · pakistan visit – jom fund management during december we...

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