As a global equity generalist, I often found myself drawn to countries where perceptions were far worse than the underlying reality…and in 2005, Pakistan was a spectacular case of just such a phenomenon. The country had improving fundamentals, was the recipient of significant US aid, and many of the companies were attractively priced. I was so intrigued by the country’s prospects that by 2007, I had allocated more than 20% of the portfolio I helped run in Pakistani equities. I even joined the Board of the US Pakistan Business Council. Between 2005 and 2007, Pakistan offered a compelling risk-reward tradeoff.
The situation today, however, is very different. The stock market is up over 30% in the past year and yet the country appears delicately balanced on the edge of complete chaos. While the current unrest is supposedly driven by discomfort with the election process and the economic agenda, I believe the roots of the unrest lie at least partially in the country’s high vulnerability to food prices. After all, surely the likelihood of protest would fall if citizens had full bellies. Are the Pakistani protesters hungry?
With more than 45% of the average Pakistani man’s budget going to food, upward food price pressures have the potential to force very tough decisions. A 20% rise in food prices – not particularly unlikely given the boom in emerging market middle class demand for protein – will make the Pakistani man choose between cutting calories, abandoning shelter, or forgoing needed medicine to make up the 9% loss in budget power. Not a pretty situation and one in which the populace becomes more disposed to unrest. Recent unrest may have been sparked by a cricket-player accusing election fraud, but the food vulnerability tinder is already in place…and recent flooding can not be helping the situation.
So what? How might these dynamics affect the world? Perhaps the most obvious way is through increased geopolitical chaos, creating greater economic and political volatility. Let’s not forget that Pakistan is a nuclear-armed nation of approximately 180 million people that shares borders with India, Afghanistan, and Iran – a part of the world in which unrest is not particularly needed! While chaos in Pakistan may spill into Afghanistan, it is Pakistan-India relations that worry me most.
The broader ramifications of food vulnerability are also concerning. Unlike the promise of de-coupled experiences so zealously promoted by Las Vegas, what happens in Pakistan may happen elsewhere. If food vulnerability creates dry and combustible tinder eagerly awaiting ignition, countries such as Indonesia may be next. Is Pakistan a canary in the coal mine?