JS Securities Limited – Morning Briefing

Karachi, July 11, 2018 (PPI-OT): Pakistan Investment Conference (PIC) 2018 – Key takeaways

JS Global Capital organized a three-day Pakistan Investment Conference (PIC) 2018 from 25-27 June 2018 across Washington and New York.

We met with key officials from the US State Department, US-Pakistan Business Council, a scholarly audience at the Woodrow Wilson International Center and more than twenty leading global asset managers from US and Europe.

Discussions broadly remained around the political scenario ahead of the general elections and the country’s macroeconomic outlook.

Investors acknowledged Pakistan’s consumption story with vast potential of growth in its retail market, a booming digital economy and increasing urbanization trend.

With deep discount of ~35% (KSE100 P/E: 8.7x, MSCI EM: P/E of 13.3x), investors continue to find Pakistan’s equity market at attractive levels; however, we observed that timing of fresh investments remains a key concern at the moment, which would be influenced by political developments and a potential IMF program in the near future.

PIC – A great platform to interact with global investors

JS Global Capital, with support of our US partner, Rosenblatt Securities Inc, organized a three-day Pakistan Investment Conference (PIC) 2018 from 25-27 June 2018 with venues in Washington and New York. This was the third edition in our series of Pakistan Investment Conferences to pitch Pakistan’s growth story to global investors. Pakistan’s delegation was hosted by the US policy makers at the US State Department in Washington. Moreover, we met with a scholarly audience at the Woodrow Wilson International Center, a leading US think tank. We also held meetings with potential trade and investment partners from US-Pakistan Business Council at the US Chamber of Commerce. In addition, one-on-one meetings were conducted with more than twenty leading global asset managers from US and Europe in New York. The Pakistani entourage was accompanied by representatives of Overseas Investors Chamber of Commerce and Industry (OICCI), Pakistan Business Council (PBC) and Pakistan Stock Exchange (PSX), along with senior management of over ten companies from a diverse range of sectors including Energy, Banking, Cement, Fertilizer, Consumer and Pharmaceuticals. The main objective of the conference was to present Pakistan’s positive narrative, which is often not well reflected in the international media. The Pakistan team led comprehensive discussions on politics, economy and CPEC whereas corporates from various industries shared their business plans and strategies given tremendous growth opportunities in Pakistan. We highlight that considerable interest was shown in CPEC-related infrastructural projects, agriculture and water storage solutions, in addition to several other key areas of the economy. All in all, the conference was a great success where we believe it would go a long way in attracting both foreign direct investment as well as foreign portfolio investment in Pakistan.

Macroeconomics and politics dominated discussions; Pakistan’s consumption theme also remained at the fore

Where investors appreciated ongoing improvements in the security situation of Pakistan, key discussions broadly revolved around the political scenario ahead of the general elections and the country’s macroeconomic outlook. Investors remained concerned over burgeoning twin deficits and depleting foreign exchange reserves; leading to expectations of entrance into a fresh IMF program. Moreover, investors also acknowledged that the rupee coming down to a relatively realistic level would ensure a level playing field for Pakistani exports. Additionally, it would also bring back foreign investors’ confidence by reducing the risk of losing dollarbased gains in the capital markets. Furthermore, investors also expressed optimism in sectors such as Exploration and Production, Banking, Textile and Power that they view as potentially safer bets in the current backdrop of rupee weakness against the greenback. With the sixth largest population of the world dominated by an age bracket of below 30yr, investors acknowledged Pakistan’s consumption story with vast potential of growth in its retail market and a booming digital economy bolstered by an increasing trend towards urbanization. Moreover, the country’s strategic location coupled with energy and infrastructure investments under China Pakistan Economic Corridor (CPEC) was well received by investors. Particular emphasis was placed by the Pakistani delegation on CPEC’s opportunities for investors across the globe, emphatically dispelling the myth of it being earmarked only for Chinese and Pakistani investors. A case-in-point highlighted during the course of the meetings is the US-based General Electric (GE), which is equipping CPEC’s projects with state-of-the-art energy-related infrastructure in Pakistan. Key sectors for investment under CPEC and otherwise were underlined including energy, technology, agriculture, water, logistics, pharma, tourism, integrated financial services and security solutions.

Equity valuations look compelling; yet multiple contraction cannot be dismissed

With the local market trading at a deep discount of 35% (KSE100 P/E: 8.7x, MSCI EM: P/E of 13.3x), investors continue to find Pakistan’s equity market at attractive levels. However, we observed that timing of fresh investments remains a key concern, which would continue to be influenced by on-going political developments ahead of the general elections. Simultaneously, there remains dark clouds over Pakistan’s near term economic outlook which could keep the case for valuation contraction relevant at least until the country secures new funding to finance balance of payments. We unequivocally emphasize that any further delay in necessary policy action to address macroeconomic imbalances poses most risk in that scenario where deteriorating external account situation would only lead to continuation in the bearish trend. Nevertheless, we argue that it is quite normal for an emerging economy such as Pakistan to face external account pressures in its push for strong economic growth. Supply-side constraints typically surface in times of rising economic activity. Additionally, growth in imports is yet another symptom of booming economy and such a pattern is commonplace in emerging economies. Therefore, the need of the hour in our view is a comprehensive economic policy geared towards enhancement of exports and rationalization of imports while simultaneously addressing structural inefficiencies, even at a cost of rising sustainable debt levels, if leading to prolonged economic growth.