While shutting down the stock exchange and being forced to get a line of credit from the IMF are not exactly factors that are likely to attract foreign investors, there are two key questions that investors should ask when looking at Pakistan, according to Credit Suisse. First, are those developments factored into share price valuations? Second, are fundamentals at least starting to move in the right direction?
"On virtually every valuation metric that we look at, Pakistan's valuations look compelling versus the rest of Asia," Credit Suisse says in a recent report.
Credit Suisse notes that Pakistan is trading at a 142% discount versus the region. Not only does this make Pakistan the most undervalued market, but the 142% discount is almost five times the 30% discount that Thailand (the second most undervalued market in the region) trades at, Credit Suisse adds.
Credit Suisse arrived at a 142% discount by comparing relative price-to-book (Pakistan's P/B is 1.91 times versus Asia's 1.86 times) with relative return-on-equity (Pakistan's ROE is 26.7% versus Asia's 11%). Historically, Pakistan has traded at a 62% discount to the region. The discount was bigger in December, at 177%.
While there has recently been some political stability in Pakistan, the key risks to Credit Suisse's bullish call remain the political situation or a sudden run-up in oil prices, given that oil accounts for one-third of the import bill and could pressure the current account.