Crisis Investing: A Look Into Pakistan’s Financial Markets

After the December 2007 assassination of Prime Minister Benazir Bhutto, the Karachi Stock Exchange plummeted along with Pakistan stocks… with a delay caused by a government suspension of trading.

But on the market’s reopen, Pakistan’s financial markets were plunged into economic and political uncertainty, as fears of waning foreign investor sentiment raged.

But where there’s crisis, there’s wealth.

It’s known as “blood in the streets investing” or “crisis investing.”

It’s not for everyone. Crisis investing may seem cold, heartless, and a cheap way to make a buck.

In fact, most investors won’t touch a ghastly scene. And that’s precisely why it works.

While the masses are selling, those who can stomach the wreckage step in and buy quality companies at significant discounts.

As with the case of the unfortunate Bhutto assassination, investors waited for the news to be fully disseminated, and for the news to begin tapering off. At that point, they bought the damaged stocks, and waited for a recovery.

Crisis investors always look for the political turmoil… financial hardships… assassinations… bloody uprisings… the instances that seed wealth.

Crisis breeds opportunity, and it’s been exemplified many times.

· Had you bought MCB Bank (MCBBI) for example after a fall from $14 to $12, you stood to profit on the recovery from $12 to more than $15.

· NetSol (NTWK) fell from $2.75 to about $1.75, only to recover from $1.75 to $2.50.

· Pakistan Oil & Gas Development (ODVCI) fell from $21 to $18.50 only to recover to $22 shortly thereafter.

History of Crisis Investing Opportunities

In 2007, for example, the Bovespa sold off and later recovered based on the market’s absorption of U.S. rate hike fears. Those who sold at or near the bottom of the sell-off missed the opportunity to profit as the IGBC rose 402.03 points, or 6.5%, two days later, and to pre-fear levels a year later.

The U.S. markets sold off following the March 13, 2007 Mortgage Bankers Association’s most unflattering report on mortgage delinquencies. Solely on fears that heavy delinquencies would destabilize the U.S. economy, the Dow plunged 242.66 points, or 1.97%. The S&P 500 tumbled 28.65 points. The Nasdaq fell 51.72 points, or 2.15%. And the Volatility Index (VIX) spiked from 13 to more than 21.

In 2001, for example, severe political and economic crises stripped 50% off the Turkish lira, as hundreds lost their jobs. But had you bought the “crisis investment” opportunity, buying shares of strong, but beaten-down companies, you’d have made a small fortune. Turkcell, for example, plunged from $24 to $1.50 only to recover to $16.52 following the crisis.

Even George Soros has used crisis investments to his advantage. He made a billion dollars in one day playing England’s Black Wednesday currency crisis.

Truth told… When crises, such as Bhutto’s assassination, occur, be prepared to buy. Buying “blood in the streets” may sound cold, but it’s proven to be profitable.

How To Invest in Post- Musharraf Pakistan

Faced with growing threats of impeachment by the ruling coalition government, Musharraf gave in and announced he was stepping down. “After viewing the situation and consulting legal advisers and political allies, with their advice I have decided to resign,” Musharraf said. “Please accept this decision. I am not thinking on personal levels, but Pakistan first. Take care of Pakistan.”

And it was no surprise when Pakistani stocks flew on news that President Pervez Musharraf was stepping down. We had a crisis over Musharraf and political turmoil. We had our opportunity to buy on Musharraf’s announcement. Crisis bred an opportunity.

So it came as no surprise when the Karachi Stock Exchange jumped about 5% to 10,719 on the news. Investors were buying the opportunity on the expectation that the change would end political deadlock

While there’s still time to buy the post-turmoil stocks we mentioned above, the rally’s sustainability will depend on who replaces Musharraf and how the fiscal policies would be resolved.

Crisis investing - you can buy the whole seat, but you’ll only need the edge.

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