Many investors, however, argue it is exactly these troubled conditions which have created the ideal emerging market investment opportunity.
Charles Blackmore, country head of Jardine Fleming's Pakistan operation, said: "What we see in Pakistan at the moment is an enormous amount of potential. Last year's victory of the Sharif government has given us hope that the economy can be significantly turned around. The numbers on the trade and fiscal deficit, inflation and interest rates are already beginning to improve."
Last year's stock market gains came mostly in the first half, following Sharif's success and, for the first time in many years, the election of a government with a working majority. Investors hoped that with a stable and strong government in place, some of the many reforms necessary to attract additional investment capital to the country would be executed.
Isle of Man-based Colin Kingsnorth, an emerging market fund manager with value investor Regent Pacific, has around $12m invested in Pakistan via two funds. He said: "Sharif's victory led both domestic and foreign investors to feel the risk premium associated with the country was lower and interest rate sensitive stocks, such as Hub Power, had a very strong rally."
"The government's failure to capitalise on its political power and really push the reform process forward led to some selling later in the year. The crisis in the rest of Asia also had a major impact on Pakistan, although less so than in other countries."
Despite initial disappointment, many investors remain optimistic that Sharif's government will privatise and deregulate the economy, stimulating growth and share price gains.
Jardine Fleming, which has brokerage, corporate finance and research capabilities in Karachi, forecasts a further market gain of 20 per cent in Dollar terms this year.
"By the end of 1998 we expect a substantial chunk of the privatisation programme to have been implemented, although there could be some delay to the timetable. There is good news on the Pakistan Telecommunications front, where Goldman Sachs has been appointed advisor. And there are also a few smaller privatisations taking place in the banking sector," said Mr Blackmore.
At the moment the Karachi stock market, with a market capitalisation of around $11bn, is dominated by very few companies. The state-run telecommunications company, PTCL, accounts for almost one third of the market capitalisation and Hub Power accounts for a further 11 per cent of the market.
Another feature of the market is its price. The price earnings ratio in Pakistan is an estimated 10 times 1998 earnings, down from 11 times actual 1997 earnings. For value investors, such as Regent, the market's low valuations has been one of its major attractions.
One Hong Kong-based fund manager says that one thing Pakistan can boast is well-managed companies. He said: "To have survived the difficult operating environment created by previous governments and entrenched interests is a miracle. Companies like Hub Power and Engro Chemical and Faysal Bank have proved that they can make money in the most trying circumstances, proving themselves to be exceptional companies. This can only bode well for when the macro environment improves."
One of the factors which continues to dominate fund managers' minds is the currency outlook. Although investors can have direct access to the market if they set up relationships with local brokers and custodians, the currency moves are difficult to manage. There was an 8.7 per cent devaluation last October and Jardine Fleming forecasts a further 7 per cent devaluation by the end of June.Reuse content