Could political change prompt a re-rating?

By Hamlin Lovell, NordicInvestor

Nordic Investor interviewed two fund managers investing in Pakistan: Mattias Martinsson, CIO of frontier markets specialist Tundra Fonder, based in Stockholm, Sweden; and Mustafa Pasha, CIO of Lakson Investments Limited, based in Karachi, Pakistan.

Though Pakistan was upgraded to “emerging markets” status by MSCI in 2017, Tundra is not bound by the MSCI definition. Martinsson defines frontier markets as“undeveloped or abandoned markets with economies growing from a low base and big populations”.


Pakistan offers a great long-term growth story, with a very young population of over 200 million people, a middle class of 80 million, and consumption making up 90% of the economy. Penetration of bank accounts, internet access and cars is very low, though cellular is higher and one million mobile phones a month are being sold. Still, economic growth averaging close to 5% is slower than other frontiers such as Bangladesh and Vietnam at nearer 7%.

This is partly because “FDI running at $2 billion a year is actually quite dismal, with a few exceptions such as Dutch firm Friesland Campina taking a stake in Engro Foods” says Pasha. As part of China’s Belt and Road initiative, the $60 billion China Pakistan Economic Corridor (CPEC) excited markets in 2015, as a “game changer” promising record spending on infrastructure, energy, transport and so on.

But CPEC has proved to be a double-edged sword, as increased imports from China exacerbate Pakistan’s external deficit. Pakistan historically has an IMF bailout every five years and is likely to need one very soon. Foreign currency reserves cover only a couple of months of imports while the current account deficit is averaging almost USD 2 billion per month. It is not yet clear whether the support will come from one or more of: the IMF; the World Bank; the Asian Development Bank; friendly countries such as Saudi Arabia and China; deferred payments for oil; Islamic finance or Pakistani expatriate bonds. 

Pasha “would prefer an IMF programme as the conditions attached to lending would force the government to enact structural reforms essential for a sustainable growth trajectory”.  Historically, the start of IMF programmes has generally marked the trough for the currency and been a positive catalyst for financial markets in Pakistan.

Mattias Martinsson, Tundra Fonder

the judiciary, bureaucracy and military – are aligned with the executive on that the agenda to create a more business friendly environment and improve governance


Politics could also be at a constructive inflection point. Imran Khan’s new political party has won broader-based geographic support than other political parties in the recent past. There is potential for structural improvements in tax collection (currently only 1% of the population pay tax which is 12% of GDP) and addressing corruption. Pasha believes that other organs of government – “the judiciary, bureaucracy and military – are aligned with the executive on that the agenda to create a more business friendly environment and improve governance”. Martinsson, who visits Pakistan twice a year, feels that “the new government could be almost like the New Deal in the US”.

Lowly valued stockmarket

Pakistan’s equity market – 558 companies with market cap around USD 70 billion somewhat higher than Bangladesh – has generated average annual returns of around 16% since 2000, in USD terms. The Pakistani Rupee has roughly halved against the USD over that period.

“The Pakistani market has outperformed India over the past decade in USD. We aim for market returns of 10% plus alpha before fees of 7.5%, and we expect to get that from Pakistan” says Martinsson.

Valuations in Pakistan have always been relatively cheap, with PE ratios ranging between 6 and 12 times. After a pullback of 20%, Pasha reckons the market is on a PE ratio of around 8 times. Martinsson thinks it might be on more like 9 times after some earnings downgrades. In either case, valuations are much lower than for large caps in Bangladesh and Vietnam, and liquidity is amongst the best in frontier markets. Pasha sees scope for earnings multiples to expand, perhaps up to 12-13 times.

interest rate hikes should allow banks to increase profits…cyclical sectors such as cement and steel should benefit from the expected focus on plugging a housing shortage of over 5 million units

The market is dominated by banks, oil and gas and fertilisers. Lakson finds oil companies with earnings growth forecast at 15-20% are trading at PE ratios even less than seven. Meanwhile premier banks in Pakistan valued at a price to book value of 1 or 1.5 times, despite return on equity close to 20%, are at big discounts to banks elsewhere in Asia valued as highly as 3-4x book value. Pasha expects interest rate hikes (in response to inflation) in Pakistan should allow banks to expand their net interest margin spreads, and increase profits. Meanwhile after a period of consolidation, cyclical sectors such as cement and steel should benefit from the expected focus on plugging a housing shortage of over 5 million units. Tundra is overweight banks too, including an Islamic finance bank, and also likes the cement sector.

Dividend yields are close to 5%, with a withholding tax of between 7.5% and 10%.

Mustafa Pasha, Lakson Investments


Tundra runs a dedicated Pakistan fund, launched in October 2011, with assets around USD 50 million. Tundra also has a frontier markets vehicle running USD 200 million, which currently has around USD 36 million or 18% in Pakistan.

The Lakson Equity Fund was launched in November 2009 and currently has assets of around USD 30 million. Lakson Investments manages over USD 220 million which is invested in Pakistani capital markets, through a combination of mutual funds and separately managed accounts. Lakson also runs daily dealing local mutual funds, “which are not charged tax on dividends or capital gains. There are no capital controls on the repatriation of capital, profit and dividends” says Pasha. Local branches of international banks such as Citibank, Standard Chartered and Deutsche Bank, offer custody as does the central CDC depositary.

Private equity

The broader Lakson group has a long history of running businesses in Pakistan, such as Colgate Palmolive, McDonalds and a joint venture with the New York Times. Separate to its public equity funds, Lakson looks to raise USD 10-15 million for the markets first venture capital fund that aims to invests between USD 250,00 and 750,000 in eight to ten investment opportunities.  The focus of the Fund will be investing where they can leverage technology to disrupt current ways in which business is done or use technology to scale and grow exponentially.

Lakson has also gathered USD 25 million for a private equity fund that plans to invest up to a majority of the fund into the healthcare sector such as hospitals, diagnostic clinics and medical technology. The VC and PE teams have a track record of investments in the USA, UK, UAE, South East Asia, Cyprus, Armenia, and Pakistan, which have generated multiples up to 4x.

Lakson is cognisant of potential conflicts of interest, hence there are strict Chinese walls between the different investment groups including Public Equity.

The Tundra Pakistan fund owns two pre-IPO equities, where an IPO is expected within 12 months.


Pasha expects ESG investing to be the next big theme for foreign investors in Pakistan. He finds that “companies with more transparent reporting and better governance, independent boards, etc attract higher valuations”.  Lakson Investments employs a full time ESG Director responsible for ensuring not only the firm stays ESG compliant but also a dialog is initiated with the firms Lakson invests in.

Pakistani companies have surprisingly well-developed CSR work and companies care about their workers. Financial reporting is quarterly. That said, there is room for improvement in transparency and corporate governance, as in any frontier market

Lakson also runs a Socially Responsible strategy, where the restrictions will often overlap with some ESG criteria.

Martinsson finds that “Pakistani companies have surprisingly well-developed CSR (Corporate Social Responsibility) work and companies care about their workers. Financial reporting is quarterly. That said, there is room for improvement in transparency and corporate governance, as in any frontier market”.

Tundra is a signatory of the UN PRI, and excludes certain companies eg those involved with  child labour, money laundering, from all of its funds. Historically, Tundra has found one company was using child labour through a subsidiary. More recently, in September 2017, Pakistan’s Habib Bank has lost its US license after New York’s Department for Financial Services found weaknesses in anti-money laundering controls. “Our policy is to divest if problems are not remedied within 12 months” says Martinsson. To this end, Tundra is engaged in a dialogue with Habib Bank, and ESG consultant Sustainalytics.

Tundra also has an ESG Frontier Markets fund, which has more traditional ESG exclusions, avoiding whole sectors including energy, fossil fuels, alcohol, and tobacco.