Supporters listen to Imran Khan, chairman of Pakistan Tehreek-e-Insaf. (Photographer: Asad Zaidi/Bloomberg)

No Winners Seen for Investors in Pakistan Neck-and-Neck Election

(Bloomberg) -- Whoever wins Pakistan’s election next week, gains in the rupee, stocks and bonds are likely to be short-lived as the new government grapples with a mounting set of economic challenges.

Investors including Standard Life Investment Ltd. and Frontier Investment Management Partners Ltd. say a victory for former cricket star Imran Khan’s Pakistan Tehreek-e-Insaf or Movement for Justice, would create uncertainty but could lead to progress on tackling corruption over the longer term. A win for the business-friendly Pakistan Muslim League-Nawaz would probably be better for the market, according to Terra Nova Capital Advisors Ltd.

The victor will inherit a fast-deteriorating economy -- the rupee has been devalued four times since December -- that will probably soon require a bailout from the International Monetary Fund. Khan is seen as being more likely to go to the IMF, while the PML-Nawaz may seek assistance from China before approaching the multilateral lender. The two parties were neck-and-neck in a Gallup Pakistan poll released earlier this month.

No Winners Seen for Investors in Pakistan Neck-and-Neck Election

Gabriel Sacks, Edinburgh-based portfolio manager at Standard Life Investments, which oversees around $30 billion of emerging-market assets

  • A PML-N victory “brings more clarity for businesses”; a Khan win could be positive longer term if they don’t try to rock the boat too much. They have an anti-corruption agenda, which is positive. They will probably be quite pragmatic, as they don’t want to cause a lot of economic damage
  • The key risk is the balance-of-payments crisis; an IMF bailout will be the best outcome and it gives the market confidence that there’s a backstop
  • It’s a tricky time but the valuations reflect these risks. It’s a cheap market and there are some very good companies to invest in, although it does take a longer-term view

Mohammed Ali Hussain at Frontier Investment, which manages $2 billion of stocks

  • Imran Khan’s government could be good for governance but he’s untested and nobody is certain about his policy direction; if he wins there will be a wait-and-see period for foreign investors, while we get a feel for his foreign and economic policy
  • If PML-N wins, there may be a short-term relief rally but then economic concerns will resurface
  • Another IMF bailout will not be easy as there were a lot of structural reforms that were delayed or not done last time round. The IMF will be much stricter in its enforcement
  • Frontier Investment has reduced its exposure to Pakistan to around 5 percent of its overall holdings from a peak 15 percent allocation last year. Hussain likes Bank Al Habib, Meezan Bank and Amreli Steels

Maheen Rahman, chief executive officer at Alfalah GHP Investment Management in Karachi

  • If PML-N comes back, they have generally shied away from the IMF over the last 4-5 years, so you’d probably see more of the same and they may go to the Chinese to fund the deficit
  • If Khan forms the government, it’s very hard to predict what will happen as the party has not been in power before
  • The worry for investors is a continuation of the conflict between government, the judiciary and the establishment that we’ve seen over the past six months. The market is really looking for a stable government
  • The new government will have to hit the ground running as the economic situation requires quick and decisive action

Ami Kemppainen, Dubai-based managing partner at Terra Nova Capital Advisors

  • Inaction is the biggest risk for Pakistan since it’s one of the smallest emerging markets and it can be ignored, so investors will wait for issues to be resolved
  • From an investor perspective, Sharif’s PML-N is probably the more favorable outcome given its market-friendly policies
  • If Khan’s party wins, the short-term question is where everything is headed

Amjad Waheed, chief executive officer at NBP Fullerton Asset Management Ltd. in Karachi

  • Whether the PML-N or Khan wins will not make a difference since the IMF will dictate economic policies
  • Domestic funds will start to invest when they see the current-account deficit is narrowing; there’s a lot of liquidity and valuations are reasonable
  • The next three months will be difficult before the economy and market starts improving

Ali Wahab, head of debt capital markets at Sharjah Islamic Bank

  • Structurally the economy isn’t as bad as it looks; Pakistan’s exports have never been that great and imports are usually high for the oil-importing nation
  • The new government will have to focus on overall structural improvements, which always come through an IMF program

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