Following liberalization measures in the 1990s, Pakistan’s stock market has modernized its operational architecture. The country offers attractive valuations relative to other emerging markets plus an economy driven by strong domestic consumption.
Investing in Pakistan offers access to the fifth-largest population in the world, and the country’s resilient domestic consumption stands out in a global economy affected by COVID-19. The benchmark KSE-100, which trades at a forward P/E of about 7x, is one of the most attractively valued among emerging markets indices, and top-tier Pakistani companies are regularly held up as some of the best in the region on profitability and investor relations.
Capital market development in Pakistan accelerated in the 1990s on a combination of privatization and other measures to liberalize the economy. Some steps included introducing a central depository for securities and opening the market to international investors, who now own about 25% of the equities free float and are treated at par with domestic investors.
The operational architecture at the Pakistan Stock Exchange (PSX) allows for electronic trading, clearing, and settlement, including that of corporate debt instruments and government securities. The PSX was formed after the merger of the Karachi, Lahore, and Islamabad bourses, and today it is majority owned by a consortium of Chinese exchanges. This has started to influence the market, going by the recent acquisition of a new Chinese trading platform and the push on innovation. In 2020 on the PSX, despite the challenges posed by the coronavirus pandemic, IPOs were oversubscribed, exchange-traded funds were launched for the first time, and the trading regime saw the introduction of index halts and wider circuit breakers.
Although Pakistan continues to suffer from a large perception gap, this dynamic is improving gradually, and the nation has several reasons for an optimistic outlook. These include technological and product innovation, which can fast-track an increase in retail investor participation (at present, only about 0.1% of the population invests in capital markets). As Pakistan’s young population quickly digitizes, the capital markets can benefit significantly from a step increase in retail investors.
This article is from "The Emerging Asia Pacific Capital Markets: Challenges and Opportunities," published by CFA Institute Research Foundation.