Pak equities a winner

Dubai - Pakistani equities are now up 18 per cent in 2016, the best-performing stock market in Asia

Morgan Stanley's MSCI decision to upgrade Pakistan from frontier to emerging markets led to a 5.6 per cent rise in Pakistan's New York country index fund. Pakistani equities are now up 18 per cent in 2016, the best-performing stock market in Asia. I remember the performance of UAE and Qatar equities after their MSCI upgrade in 2013 when both Dubai and Doha rose 40 per cent after the upgrade. I believe history will repeat itself with Pakistan, a classic candidate for a stock market rerating despite its single B sovereign risk rating and geopolitical woes. Why?
Pakistan will attract at least $500 million in index tracker funds as emerging markets are a $1.5 trillion asset class that dwarfs the $15 billion in frontier markets. The $6.7 billion IMF loan, the $46 billion Chinese transport and infrastructure package, the low bank credit to GDP ratio (15 per cent against 30 per cent for Sri Lanka and Bangladesh), the fall in the current account deficit and rupee stability, 43-year lows in interest rates and a valuation of a mere eight times earnings all boost my macro bullishness on Pakistani equities. The Pakistan Army has won its military campaign against the Taleban despite the horror of the Lahore children's park bomb planted by the terrorists. Pakistan is a geopolitical "too big to fail" nation for Washington, Beijing, Riyadh and Abu Dhabi. Pakistan has amazing demographics, is a beneficiary of the oil crash and is a consumption/service economy that can deliver five per cent GDP growth even if the US and Europe flat line.
After the currency mismanagement of the Musharraf era, hard currency reserves are again above $20 million, reducing my concerns for the Pakistani rupee. At a time when India trades at 18 times earnings, I know several emerging market fund manager friends in London and New York who plan to accumulate Pakistan. The cognoscenti in Dubai who trade Pakistani equities have laughed all the way to the bank in 2016, a dismal year for global equities. I am just thrilled I could help my Khaleej Times readers pinpoint one of the world's best money-making ideas in 2016.
I have been fascinated by Argentina ever since I was first introduced to the country by two JPMorgan Chase Porteño colleagues in New York. Buenos Aires is the Paris of Latin America, with its Belle Epoque grandeur and the estancias on its outskirts, where my dear friend Alejandro Allende, took me to his family's farm, was just stunning. Yet Argentina's tragic history so reminded me of Pakistan's lost potential. The murderous military regimes who waged a "dirty war" that culminated in General Galtieri's invasion of the Falklands and a lost war with Mrs Thatcher's Britain, the hyperinflation under Carlos Menem, the economic boom and bust that ended in history's biggest sovereign default in 2001, when an Argentina president literally fled the Casa Rosada by helicopter to escape an enraged mob. The last straw was the populist, even idiotic economic policies of the Peronists under Cristina Fernández de Kirchner. Yet the election of a center-right government under Mauricio Macri has made Argentina my emerging-market fairy tale other than Pakistan. Note the New York ADR of Argentina bank Banco Macro has risen from 38 to 70 now, a phenomenal winner.
Despite its wildly-successful $16.5 billion sovereign international bond new issue in April, Argentine faces grave macro-economic challenges. The militant, Peronist trade unions want 30 per cent pay raises could well derail Macri's target to slash the inflation rate to 17 per cent. Brazil, Argentina's largest trading partner is in deep recession. Speculative capital inflows and wealth repatriation have led to a stronger peso that hits export competitiveness. The economy can well contract in 2016 as inflation accelerates and the central bank is forced to tighten. Yet, as in Pakistan, I view Argentina banks as proxies of a longer run secular macro turnaround. This is the reason Banco Galicia and Banco Macro are so attractive. True, Argentina has defaulted on its debt eight time in its history since independence from the Spanish empire in 1816, which itself defaulted a dozen times on its foreign loans in the past four centuries. Yet Argentina finally has a credible, reformist centre-right government after the madness of the military junta, the Peronist Kirchners and the failed Washington consensus technocrats. As I called it last November, Argentina was a fairy tale for UAE investors, as exactly happened with its country fund up 23 per cent in 2016. Bueno suerte, mi amigos!