Pakistan emerges as top performer among former pariah markets, outpacing Asia’s benc marks: report

Former pariahs in emerging markets have been among the world’s best-performing stock markets this year as investors bet reforms in troubled economies such as Argentina and Pakistan will help them leave the worst of their currency woes behind them.

Argentina’s Merval index has led Latin American bourses, rising 53 per cent in US dollar terms, while Pakistan’s stock gauge is one of the best performing in Asia, as markets that until recently were seen as very troubled have outperformed larger and more expensive peers.

These so-called frontier markets have been attractive because of their cheap valuations, say investors. In contrast, indices in more established markets such as Mexico and Brazil have declined in dollar terms as capital has been pulled towards surging artificial intelligence stocks in the US.

“You’ve got a big sucking sound out of the US, called [chipmaker] Nvidia,” which has pulled money away from larger emerging markets, said James Johnstone, co-head of the emerging and frontier markets team at Redwheel, an investment manager.

“But what is performing well are markets that have gone through almost existential crises and carried out the requisite reforms,” he added.

A group of developing economies including Sri Lanka and Turkey “have been through a really difficult period” but are now primed for recovery as expensive foreign currency debts and double-digit rates of inflation are brought under control, Johnstone said.

In Pakistan, the Karachi stock market has risen 30 per cent since the start of 2024, more than Taiwan and India’s benchmark share indices. It has nearly doubled in dollar terms since June last year when the country avoided a default by securing a $3bn loan from the IMF.

“The recent rally is due to investors’ confidence that Pakistan will get a long-term IMF deal after the successful completion of the standby agreement last year,” said Mohammed Sohail, chief executive of Pakistani brokerage Topline Securities.

Even after the recent bull run, Pakistani stocks still trade about 3.7 times their earnings, roughly half the historical average of seven, Sohail added.

The biggest contribution to the rally has come from the banking sector, which has enjoyed bumper profits as the central bank raised the policy rate to above 20 per cent to bring down runaway inflation, according to a research note from Arif Habib Limited, a Pakistani brokerage. —FT