How to Invest in Pakistan

How to invest as a foreigner in Pakistani equities and bonds

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How to Invest in Pakistan?

The Country

Pakistan, the word conjures a plethora of images and it is unlikely that any of them are positive.  Terrorism, poverty, extremism, war, dictatorships, nuclear arms are probably the main things that Pakistan is known for.

Beneath all of that however, is a country and a story that make us tremendously excited.  Pakistan’s equity market has had the following returns in USD terms:

Figure 1: KSE100 annualized returns and Pakistan’s GDP Growth:

Pakistan - KSE100 Returns - 2014-09-14

The returns above are price-based returns and do not incorporate dividend returns.  For reference, the S&P 500 on this basis has returned 7.5% over the past 20 years.  Many people would look at that and dismiss any merit to investing in Pakistan.  However, correlations between the two markets are actually quite low.  See our story here.  That means that there is value in adding Pakistan to a portfolio and enhancing your return.

Pakistan was founded in 1947 when the British divided up the Indian subcontinent into Pakistan, India, Sri Lanka, and Burma (Myanmar). In that time Pakistan has gone from being the role model for emerging market countries in the 1960s into a pseudo failed-state in the 1990s and 2000s.  The country based on size, significance, and location has always held the interest of the major world powers.  See the fact box below for some basic information on Pakistan.

Figure 2: Pakistan Fact Box

Pakistan Factbox

Pakistan is definitively a Frontier Market by any of the measures above.  In 2013, for the first time in Pakistan’s history, a democratically government handed over power to another democratically elected party (rather than a military coup, as is the norm in Pakistan).  This positive news has been erased this year, as the country is currently undergoing a political crisis where opposition parties are asking the current leader, Nawaz Sharif, to step down.  Uncertainty and political instability are the norm in Pakistan.

Consistency is good for business, stability is good.  Sometimes though, consistent instability can create an environment for business to succeed.  Businesses give up hopes of relying on the government to provide basic services and security and instead pursue actions by which they can thrive in any environment.  Pakistan has a diverse economy which has managed to do just that.

Energy shortages have plagued Pakistan for the last decade, and while the government is finally acting to alleviate this issue, companies have managed to remain competitive using generators and other fuel sources.  Literacy was lagging in Pakistan.  Rather than relying on the government to provide educational services, enterprising business people formed what is now Asia’s largest NGO, The Citizens Foundation.  The organization provides high-quality education in over 1,000 schools across Pakistan and is growing rapidly.  The resilience of Pakistanis amidst all the chaos is why we invest in this country despite the melange of issues that the country has faced, is facing, and will continue to face.

The Laws

 Pakistan’s laws are based on English common law.    There are numerous initiatives to protect foreign investors in Pakistan; particularly the Foreign Private Investment Act, 1976 and the Protection of Economic Reforms Act, 1992.  More recently, Pakistan formulated ‘The Investment Policy 2013’ which has a detailed FDI strategy for the country from 2013 – 2017.  One of the main objectives of the policy is making it easier to do business in Pakistan and reducing the cost of doing business.

Company law and tort law are very similar to what one would see in the United Kingdom.  Pakistan, from a legal perspective is significantly easier to navigate than neighbouring India.  It may be one of the easiest countries to do business in, within Frontier Markets.

Enforcement is another question however.  Enforcement can be challenging and navigating Pakistani courts definitively requires the use of a domestic law firm.  But, at least the laws are easy to understand.  The judiciary in Pakistan is somewhat independent, but if a case is connected to entities or individuals with connections to the government or military you may assume you will have tremendous difficulties in having your case heard. The usual Frontier Markets’ rules apply. An excellent piece on Pakistan’s regulatory framework can be found here.

The Stock Market is regulated by the Securities and Exchange Commission of Pakistan (SECP), their website has a wealth of information and they are a well-run organization.  Their structure and record give us some confidence in putting our money in Pakistan.

The Stock Market

The Karachi Stock Exchange was founded on September 18, 1947 barely a month after the independence of the country.  See the fact box below for relevant details.

Figure 3: Stock Exchange Factbox

Pakistan - KSE Factbox

The stock market as indicated above has done far better than the country as a whole.  Pakistan’s financial and telecom sectors are world-class while Pakistan is a world leader in textiles.  Other areas such as construction materials, automotive production, and technology services are booming industries.  There are approximately 150 companies listed that have a market cap greater than $50bn.  You can find the list below that outlines relevant metrics for each of these listed companies.

Figure 4: List of Public Companies in Pakistan with market cap greater than $50mm

 

Can Foreigners Invest?

 Yes, foreigners can invest.  Please see our process step-by-step below:

  1. The first step in wanting to invest in Pakistan is setting up a Special Convertible Rupee Account (SCRA). The details of which can be found here on the State Bank of Pakistan’s website.  NIB Bank’s subsidiary PICIC Asset Management has a nice diagram here.  An SCRA account can be opened with any Authorized Dealer in Pakistan.  Banks such as Citibank or Standard Chartered offer this service, if you do not want to deal with a Pakistani bank.
  2. Once you have opened and funded an SCRA account, you can approach one of the dozens of brokers in Pakistan about opening a bank account. Pakistan has a plethora of a high-calibre brokers.  The KSE is rather advanced relative to Pakistan’s development.  Electronic trading is the norm and transaction costs are comparable to a discount brokerage in the United States.  Some of the most reputable brokerages are:

    a) KASB Direct kasbdirect.com
             b) AKD Trade akdtrade.com
             c) Arif Habib Limited arifhabibltd.com
             d) SCS scstrade.com

  3. These folks and the SCRA require the usual documents; passport, address, photographs, banking details for your domestic bank, your profession, etc. Nothing out of the ordinary here. You can easily wire money from your domestic bank account to any of the major Pakistani bank accounts and then use that account to receive dividends and other such payments from your online brokerage account.  You may also explore investing in interest-bearing deposits with these accounts as well.  Pakistan’s interest rate has provided on average, a 7% return over the past 5 years for investors (net of PKR depreciation).

As far as process goes it really is that simple.  However, getting that initial SCRA is not exactly easy.  Working from abroad, getting a Pakistani bank’s attention is rather challenging.  If you have a banking relationship with Citibank or Standard Chartered I would strongly encourage using that relationship to get an SCRA open.  If you do not, then perseverance and resourcefulness are key.  Unfortunately, no broker wants to walk you through the process of getting an SCRA.

If you have any advice for potential investors in Pakistan, please share it below and help the community out.

Conclusion

We think Pakistan is a great place to invest and the stock market is far more sophisticated than other similar Frontier Markets.  The country’s size, location, and resources imply that at some point the country will begin rapid growth.  Until that time, we have confidence the private sector can weather the storms that its government and its location throw at the sector.  There will be horrible years and this is not a low-risk investment, but it may all be worthwhile when you look back 20 years from now.

If we can help you in any way, please let us know.

Some resources that may help you in your investment decision-making process:

Investment Guide – State Bank of Pakistan

Standard Chartered Pakistan

Karachi Stock Exchange

Business Recorder – Pakistan’s best business publication.

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