Pakistan’s stock market outshines larger frontier peers in Asia

December 14, 2023 (MLN): Pakistan stands among the biggest gainers in the Asian region this year as improving macroeconomic conditions bode well for earnings, Bloomberg reported.

Risky frontier stock markets, including Pakistan, Laos, and Sri Lanka, stand out as the biggest gainers in the region in 2023.

A loan deal with the International Monetary Fund has helped spark a rally of more than 60% in the KSE-100 Index this year, while easing interest rates are supporting a 28% surge in the Colombo All-Share Index.

The sharp gains in the minnows are raising hopes that the rally may extend to markets such as Bangladesh and Vietnam, amid signs global investors are becoming comfortable with riskier assets even as a debt crisis brews across the wider frontier region.

Lower borrowing cost in some of these markets also supports their bullish case.

“The rally in Asian frontier markets will continue and broaden in 2024, as dovish monetary policies and economic recovery will drive a rebound in earnings,” said Ruchir Desai, a Hong Kong-based fund manager at Asia Frontier Capital Ltd.

The AFC Asia Frontier Fund has outperformed 98% of its peers this year, data compiled by Bloomberg showed.

The 12-month forward earnings estimates for members of the MSCI Frontier Asia Index, which consists of stocks from economies that are smaller and riskier than emerging markets, have risen more than 8% this quarter.

Valuations are also attractive, with the gauge trading at 9.8 times forward earnings, well below the five-year mean of 13.8 times, data compiled by Bloomberg show.

Pakistan may see more inflows as local asset managers turned into net buyers this month, said Ali Raza, head of international equity trading at BMA Capital Management.

Foreigners turned into net purchasers of the South Asian nation’s shares in November after two months of outflows.

Still, the outlook for these economies is uncertain as many of their governments are slashing spending to stay solvent, which may affect investments and businesses.

But progressive debt restructuring and fiscal recovery should buoy sentiment going forward. Bangladesh, like Pakistan, could benefit from lower oil prices and reduced leverage while Vietnam’s market will be supported by rate cuts similar to Sri Lanka’s case, said Nirgunan Tiruchelvam, an analyst at Aletheia Capital in Singapore.

While the frontier gauge is up 5.1% this year, the gains barely make up for the 44% slump in 2022, the most on record. Vietnam dominates that gauge with a weighting of nearly 80%.

“As earnings improve and macro adjustments take place, such strong rallies could take place in Bangladesh and Vietnam in 2024,” Desai of Asia Frontier said.

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