Pakistan Carries Lots Of Risk, But May Also Offer High Reward

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Includes: PAK
by: MarketGyrations
Summary

Pakistan is a country with a high level of risk due to many problems that remain unresolved.

Change may be near as there is an effort underway that could transform Pakistan into something much more.

Pakistan will probably not generate a good return short term, but it could be different long term.

ETFs have really taken off as a way to invest. One of the more recent additions is the Global X MSCI Pakistan ETF (NYSEARCA:PAK), an ETF that offers exposure to the country of Pakistan. This country is considered to be one of the frontier markets, next in line to the emerging markets in terms of potential growth in the future.

Pakistan does have a very large population at almost 200 million that's also relatively young. In theory, such countries have lots of room for growth. On the other hand, there are a number of reasons why many people may not consider Pakistan to be an attractive investment destination.

Why people may want to stay away from Pakistan

There are lots of reasons why people can be hesitant when it comes to Pakistan. For instance, the country is quite unstable with internal strife. There are a number of separatist groups in several areas of the country who oppose the central government and are waging an armed struggle to become independent. Violence is much more prevalent than in many other countries.

Pakistan is not exactly the most stable country politically. An elected government may not necessarily complete its full term. Too frequent change of government can make it hard to implement policies that can develop the country. That's frustrating because large sections of population could really benefit from an increase in living standards.

Pakistan is not blessed with natural resources, at least in comparison to some of the other countries in the neighborhood. The lack of resources makes it hard to finance projects and turn paper plans into reality. Pakistan suffers from a severe shortage of power and without electricity there's not much you can do. In short, Pakistan is a country with a lot of problems.

Pakistan is strategically located

Source: Wikimedia

Why Pakistan has potential

With all the problems Pakistan has to deal with, there is one reason why the country could have a brighter future than may be apparent at first sight. Pakistan is strategically located with a geographic position that allows it to be a gateway to the landlocked countries in Central Asia and to China, a country whose combined imports and exports ranks at the top.

Pakistan gives China and its extensive trade the opportunity to access the Indian Ocean over land and without going through the Malacca Straits which is much longer. Around one fourth of all global trade currently has to pass through the Malacca Straits, which gives an indication of just how much trade there is in this part of the world.

The current situation with the Malacca Straits has a number of drawbacks such as congestion, which is why countries such as China are interested in finding alternatives. Trade between China, the Middle East and Africa could go through Pakistan instead of the Malacca Straits, something that is not possible currently due to the lack of infrastructure in Pakistan.

However, during a recent trip to Pakistan, the Chinese president committed $46 billion in funding to help Pakistan become the link that connects east and west. This initiative is known as the China-Pakistan Economic Corridor or CPEC. If or when this gets off the ground, Pakistan stands to benefit greatly from the changes that would occur.

A number of global trade routes would shift and Pakistan would be at the center of new trade routes. Instead of mostly bypassing the country as is the case right now, large numbers of ships would head to and from Pakistan. Just capturing a portion of the current trade between China, Africa and the Middle East would yield many benefits to Pakistan's economy.

For instance, the port of Gwadar in Pakistan has the potential to become one of the busiest in the world, especially with its close proximity to the Persian Gulf and the oil-producing countries in the region. The crude oil originating from this part of the world is essential to maintain society as we now know it.

The Pakistan of the future and the one right now could be like comparing night and day. Being at the heart of so much trade would generate a level of economic activity, revenue and employment that just isn't there right now in Pakistan. This could propel the economy forward like it hasn't been able to do before, which would benefit all those with a stake in Pakistan.

Conclusion

Pakistan right now may not have a lot going for it. The country has so many unresolved issues and there's so much that could go wrong. For all you know, Pakistan could break apart as a single country. People are right to be hesitant when it comes to Pakistan due to the level of risk that the country carries within.

However, there are efforts underway that could turn Pakistan into something much more than it's right now. It's not certain that these initiatives will be successful one day. On the other hand, China certainly seems to believe in Pakistan. Especially when you take into account the amount China is willing to put into the country, which is not that big of an economy.

For most people, Pakistan is arguably not a good investment in the short term when you have so many other alternatives with much less baggage to worry about. The risk is too high. At the same time, it's a good idea to keep an eye on Pakistan because the potential is there. Doing so could pay off in the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.