Forget India. Investors looking for the next big thing should look to its South Asia neighbors instead – Pakistan, Bangladesh and Sri Lanka.
With a combined 390 million people, the three countries represent what Morgan Stanley chief global strategist Ruchir Sharma calls “the quiet rise of South Asia” as opposed to India which has been “flattered by spasms of hype for years”. While overshadowed by their larger neighbor, the trio is enjoying fast-paced growth, embracing much needed reforms, and look set to enjoy a demographic dividend over the long term. “A substantially higher economic growth rate than in many other economies globally, coupled with fantastic demographics that will continue supporting growth for many years ahead”, East Capital fund manager Adrian Pop tells Barron’s Asia. The Stockholm-based firm manages nearly EUR3 billion in frontier markets.
Pakistan is the flag bearer of the positive changes taking place in the South Asian nations. Since coming to power five years ago, Prime Minister Nawaz Sharif has got inflation under control, cut the budget deficit and reined in the current account deficit. But more importantly, terrorism finally appears to be on the back-foot given more assertive action by the army. Chinese investment has also poured in: $50 billion will be spent on new roads, transport links and energy projects. “More power capacity is key for Pakistan to move to an even higher economic growth rate,” says Pop. That will benefit stocks in materials and energy. In December, the Pakistan Stock Exchange sold 40% of itself to consortium of Chinese investors.
The Karachi stock index is up by about 50% since the start of last year, propelled by index compiler MSCI’s decision to bump up the country to emerging markets status. That will bring in hundreds of millions of dollars from passive funds into the Pakistani benchmark. The rally in stocks has arguably left the market looking a little pricey as the KSE 100 index trades at over 12 times earnings, its heftiest valuation since late 2009. That’s still about a 15% discount to the MSCI emerging markets index, however, plus Pakistani stocks yield an attractive 4%-plus dividend.