Pakistan Is an Economic Mess. Its Stock Market Look Ridiculously Cheap.

Pakistan’s stocks are cheap, but it will take a strong stomach to bet on a rebound.

FAROOQ NAEEM / AFP / Getty Images

Pakistan’s long-suffering stock market got a boost after cricket star-turned prime minister, Imran Khan, finally yielded power, thwarted in his plan to instead dissolve parliament.

The Global X MSCI Pakistan exchange-traded fund (ticker: PAK) is up 9% over the past week. The good vibes look fragile, as Khan rallies supporters in the streets and soaring fuel and food costs keep inflation in double digits.

“Political instability is increasing as economic challenges rise,” says Arif Rafiq, president of political-risk adviser Vizier Consulting. “Optimism is not a word I would use for Pakistan right now.”

The bright side is that stocks are cheap, down by three-quarters from a peak in 2017. “Pakistani companies are trading at ridiculous valuations,” says Faisal Ghori, director of research at frontier and emerging markets specialist Consilium Investment Management. It will still take a strong stomach to bet on a rebound.

Khan, elected in 2018 as a reformist outsider, left behind a prodigious economic mess. Inflation is 13% and pushing higher. Foreign reserves are down to two months’ worth of imports. The Pakistani rupee has slid 16% against the dollar over the past year. Khan’s obsession with an alleged U.S. conspiracy to overthrow him didn’t improve the investment climate. Nor did his visit to President Vladimir Putin the day after Russia invaded Ukraine.

“Imran’s anti-American rhetoric was starting to sound a bit unhinged,” says Irfan Nooruddin, senior director of the Atlantic Council’s South Asia Center.

The old guard has returned to power in Islamabad with a vengeance. Khan’s successor, Shehbaz Sharif, is the younger brother of Nawaz Sharif, a three-time prime minister, and himself a seasoned regional leader. Signs of adults regaining the room are so far scarce, though. Sharif immediately hiked pensions and public-sector salaries, balms that should only feed inflation.

“This government doesn’t want responsibility for tough decisions,” Rafiq notes. He expects new elections well before their mandated date in August 2023, heralding more political turmoil.

Some stocks are still attractive in a nation of 220 million, with long-term growth rates north of 5%, a burgeoning middle class, and a wealth of English-speaking tech talent, Ghori argues.

Pakistan is at the edge of its digital transformation, with startups from food delivery to payday lending racing to scale. “More venture capital came into Pakistan in 2021 than in the last five years combined,” he says.

He’s bullish on information-technology company Systems (SYS.Pakistan), a relative giant in Pakistan. He also likes Lucky Cement (LUCK.Pakistan) as a consumer play, thanks to a large joint venture with Kia (000270.Korea) and Meezan Bank (MEBL.Pakistan), whose interest-free sharia-observant depositor base is an advantage as interest rates rise.

Khan’s government did make progress cleaning up Pakistan’s reputation for money laundering. Nooruddin says. The country will probably get off the multilateral Financial Action Task Force’s “gray list” this year, he predicts, bolstering the business climate.

Alison Graham, chief investment officer at frontier-markets house Voltan Capital Management, isn’t buying the Pakistan story. Two dozen International Monetary Fund bailouts, plus innumerable power shuffles, have failed to find the country a groove like its more dynamic neighbors. Pakistan’s exports have actually declined over the past decade. “People talk about industry moving from China to Vietnam, Bangladesh, even Cambodia, but never Pakistan,” she says. “The bounce now is a trade, not an investment.”