Believe it or not, Pakistan's financial fairytale continues

Necklaced by the Margalla Hills, with its white marble mosques, heavily-guarded diplomatic enclave, its geometric grid and lavish mansions, Pakistan's capital is an unlikely host to one of the most exciting growth stocks I have ever encountered in the frontier markets. I have made no secret of my conviction, expressed ad infinitum in this column since 2012, that Pakistan (and Argentina) are a frontier market fairytale. Pakistani shares are up more than 400 per cent for US dollar investors since 2012, making the Karachi stock exchange one of the world's best performing stock exchanges. Of course, it was not money-making ideas but my love for my darling father, my lifelong friend and mentor that took me to Islamabad.

I got an invaluable feel for the real time political and economic realities of Pakistan. In the past three months, I have been fortunate to talk to some of Pakistan's top industrialists, diplomats, money managers, bankers and even a historian whose own father was Zulfiqar Ali Bhutto's Intelligence Bureau chief. The spectacular bull market on the Karachi exchange (now 40 per cent owned by Shanghai Shenzhen) reflates these new macro realities. Karachi was Asia's best-performing stock exchange last year, up 46 per cent in 2016. Yet Pakistan still trades at only 10.8 times earnings, offers a 7.6 per cent dividend yield and earnings growth of 15 per cent. True, the Pakistani rupee is a tad overvalued and can well depreciate to 12 against the US dollar. Yet Morgan Stanley has upgraded to Pakistan to emerging market and the index will attract at least another $300 million in tracker funds. Conversations with friends tell me hundreds of new foreign fund managers have opened institutional new accounts in Pakistan. The megacity by the Arabian Sea, the city of my birth, is also the epicentre of the most frenzied property booms in Asia outside Hong Kong.

I have an emotional reason to be attracted to Shifa Hospital in Islamabad. After all, the world-class cardiologists there saved my wonderful daddy's life. However, Shifa is easily the most attractive health care proxy in this nation of 190 million people with a quantum increase in affluence, third-party medical insurance, the planet's highest fertility rates and a chronic shortage of hospital beds. I remember Shifa shares trading at Rs5 in 2003, just after the trauma of 9/11 and the US invasion of Taliban ruled Afghanistan, at the start of Pakistan's darkest decade in its history.

Shifa Hospital now trades at 265 rupees or three times book value. Shifa trades at 16 times forward earnings. The market cap is $140 million dollars. The hospital operator has a scalable model that can easily deliver 20 per cent earnings growth (CAGR) in the next five years. With its major specialties, its diagnostics labs, I can well understand why a Dubai private equity colossus tried to buy a controlling stake. I believe Shifa Hospital can rise to Rs400 by end-2018.

My father was trained in the aristocratic Lloyds of London firm Willis Faber Dumas (the syndicate that insured the HMS Titanic!) in Britain and has used his contacts in the London reinsurance market to help government ministers on complex multi-billion dollar projects. Reinsurance is mission critical to the success of the $46 billion China Pakistan Economic Corridor, which will also transform the energy sector and add at least two per cent to the structural growth rate. Thanks to Xi Jinping, Pakistan is South Asia's new tiger economy, a vast hub that will link Sinkiang and Central Asia to the Arabian Sea.

I expect the Karachi stock index will trade between 45,000 and 65,000 in the next 12 months, with Fed rate hikes leading to a fall in both equities and the Pakistani rupee. My base case is that Nawaz Sharif will be reelected in the 2018 election, despite his progeny's Panama offshore accounts and Mayfair apartments (hopefully, they hedged sterling risk!). Relations between the Prime Minister and Army House are fine since General Bajwa is a consummate professional solider who will vanquish the terrorist enclaves in North Waziristan. Pakistan is also the world only "geopolitical too-big-to-fail" state for Beijing, Washington, Riyadh and Abu Dhabi. The Chinese commitment to Pakistan also makes a land war with India unthinkable, so it will hopefully lead to a rapprochement between Islamabad and New Delhi. After 70 years, Kashmir cannot be allowed to steal the future of 1.4 billion human beings on both sides of the Radcliffe Award. The doctors at Shifa saved my daddy's life. I appeal to the military to save Commander Jadhav's life. The hangman's noose only debases all of humankind.

Source: Khaleej Times