Invest where others fear to tread

Pakistan suffers from a serious image problem in the West. But it has enormous potential and boasts the cheapest stockmarket on the continent. Manraaj Singh tips three stocks worth a closer look.

Going where other investors fear to tread can be a passport to huge gains.

Today we're looking at one of these 'no go' zones and three shares that could make you substantial profits when other investors catch on to this country's potential.

It's a country that only ever makes the news when there is a coup, a suicide bombing, refugee crises or a military offensive. But we're looking beyond those headlines. There we find rising corporate profits, cheap share prices and a growing middle class that will drive this economy forward.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

I'm talking about Pakistan one of the next major investment destinations.

OK, the coups, suicide bombings and crises are all real. But that's exactly why there are some fantastic opportunities in Pakistan. It is exactly because so many people fear this market that it still offers so many undervalued investments.

If the Nato military operation in neighbouring Afghanistan is able to keep-up the pressure on the Taliban, investors could soon start flocking back to Pakistan.

Pakistan has huge economic potential. The pace of economic growth rose from just 1.98% in 2001 to a peak of 7.7% in 2005 as the government began to open up the economy and privatise state-owned companies. Foreign investors flooded in. The Karachi Stock Exchange rose by an incredible 930% between 2001 and its peak in April last year.

But the country has been hit hard by the global recession and the rise in militant attacks. Foreign investors have fled in droves. This year, Pakistan's economy will grow by just 2.5%. And its stock market has fallen by 47% from its peak; it's now the cheapest in Asia by far. The investment bank Credit Suisse has calculated that by a fair value measure, Asian markets trade at a 140% premium to Pakistani shares.

Taliban and credit crunch or not, I expect to uncover some absolute bargain investments in this country. Three Pakistani companies that I have had my eye on have shares that trade on the London International exchange. I think that they are worth a closer look.

Two long-term plays on Pakistan's turnaround

United Bank (LI:UBLS) is one of Pakistan's top commercial banks. It focuses on servicing the corporate sector and has more than 1100 branches across the country. It has the big advantage of being backed by the colossally rich royal family of Abu Dhabi, the Al-Nahayans. The bank's chairman, Shaikh Nahayan Mabarak Al Nahayan, is also the United Arab Emirates Minister of Higher Education and Scientific Research. So there doesn't seem much chance of United Bank running into funding problems even if credit conditions in Pakistan stay tight.

Then there is MCB or Muslim Commercial Bank (LI: MCBS). This is one of Pakistan's biggest banks. It focuses on retail customers and has an impressive network of over a thousand branches and some 4 million customers. That makes it a good proxy for the long-term growth of the country's middle class.

MCB is a highly professional organisation and it has attracted a big international shareholder base. Its biggest shareholder is the Malayan Banking group, which owns a 20% stake. And the Templeton emerging markets funds headed by investment bigwig Mark Mobius are also major shareholders.

Neither of these banks is dirt cheap right now. MCB's share price has more than doubled since February and United Bank is up by some 80% over that period. They now trade at about eight times earnings. Not expensive, but not cheap either. But they are big, liquid companies and they will be among the first to benefit when international investors start looking at Pakistan seriously again.

Major banks are a good proxy for the performance of emerging markets. So as longer-term investments over the next three to five years, these two could pay-off massively.

And one punt for the brave

On a completely different note is Lucky Cement (LI:LKCS). This is Pakistan's biggest cement producer. It is also a major exporter to countries in the surrounding region. It ships cement to neighbouring Afghanistan and India as well as to Sri Lanka and the Middle East. The region is still seeing strong economic growth and that has helped this company.

Lucky Cement has delivered impressive financial results; profits have more than doubled this year and its share price has risen by 148% since the start of the year. But it still trades at a reasonable five times earnings. It's an interesting company, but not without risk. Its major cement production plant is located in the volatile North West Frontier Province where the Pakistani Taliban is active. Appropriately, its shares in Karachi trade under the ticker symbol LUCK. Here in London, its GDRs trade under the less ominous ticker symbol LKCS.

There's more work to be done and I have other candidates I'm looking at. But I believe Pakistan will be an outstanding investment opportunity in the next few years. The time to get in is when investors fear to go there. That's now.

This article was written by Manraaj Singh, and was first published in the free daily investment email The Right Side .