Western investors tend to associate Pakistan with terrorism, says Shuli Ren in Barron’s. Yet there must be more to it than that. Why else would China’s “practical and business-minded” leaders pledge to invest $46bn in an infrastructure development scheme known as the China-Pakistan economic corridor? It’s “by far Beijing’s biggest bet on another developing country”.
The Chinese have noticed that Pakistan is getting its act together. It was on the verge of a balance of payments crisis in 2013, but has impressed the International Monetary Fund with sound management and structural reforms. It has reduced overspending, cutting the budget deficit to 5% of GDP from 8% in 2012-13. It has cut expensive, inefficient electricity subsidies, beefed up tax collection and eliminated loopholes. Privatisation plans have also helped.
Lower oil prices, meanwhile, have seen inflation drop to a new low of 2.5%, from 8% last year, leaving scope for interest rate cuts. Growth is up from 3.7% in 2013 to 4.1% last year. And the country is safer – fatalities from terrorist attacks hit a seven-year low last year.
Throw in cheap valuations – a forward price/earnings ratio of around nine – and Pakistan is “an undervalued reform story”, says Renaissance Capital. Brave investors can access this small, volatile market with the DBX MSCI Pakistan ETF (LSE: XBAK).