Courtesy of Barron’s, two interesting looks at Pakistan in light of China’s announced $46B of investment in that country.  The first examines the potential impact of the investment on the market and country:

China’s President Xi Jinping is visiting Pakistan this week, promising $46 billion in infrastructure investment.

China wants to build a 3000km “economic corridor” between Kashgar in China’s western province of Xinjiang and southwest Pakistan’s Gwadar Port, giving China quicker access to Europe and the Middle East.

This $46 billion investment is the largest Beijing has bet on economic development in another country, and will boost Pakistan’s $274 billion GDP by over 15%.

This can not be purely politically driven. Beijing is commercial: CEO’s, not think tank intellectuals, travel with politicians.

Earlier this month, Pakistan sold its entire 41.5% stake in the nation’s largest bank Habib Bank(HBL.Pakistan) for $993 million. The deal was well-received and much of the demand came from international long-only institutional investors.

Pakistan is an overlooked reform story without reform valuations, according to London-basedRenaissance Capital.

Pakistan shares with India a lot of the traits that foreign investors love. Growth is picking up, from 3.7% in 2014 to 4.1% in 2014. The IMF this month boosted its GDP forecast, expecting Pakistan to grow by 4.3% this year and 4.7% next.

Just like India, Pakistan was plagued by years of high-inflation, but lower oil prices have also helped the frontier market. CPI hit a new low of 2.5% in March, down from 8.5% a year earlier. Producers price inflation has turned negative, to -3.7%. Renaissance Capital’s chief economistCharles Robertson expects Pakistan’s central bank to cut benchmark interest rate by 50-100 basis points in May.

Both India and Pakistan have a weak fiscal budget. But Prime Minister Nawaz Sharif has already cut the budget deficit in Pakistan from 8.1% of GDP in fiscal year 2013 to 4.7% in fiscal year 2014. The government is now targeting 4%. By contrast, in India, the budget deficit is 7% of the GDP and likely to remain at that level next year.

The key difference is that Pakistan is still cheap. MSCI Pakistan trades at only 8.4 times forward earnings, a 17% discount to MSCI Frontier Markets. For comparison purposes, fellow frontier south Asia markets Sri Lanka and Bangladesh trade at 13.4x and 21.4x respectively. India, which is an emerging market and therefore deserves higher valuation multiple, trade at 16.8 times.

After a dismal March, MSCI Pakistan rebounded strongly this month, returning 9.1% so far. In April, the iShares MSCI Frontier 100 ETF (FM) rose 4.3%, the WisdomTree India Earnings Fund (EPI) dropped 1.2%, the iShares MSCI India ETF (INDA) fell 1.9%.

The second suggests some ways to “play” this opportunity:

China signed 51 agreements with Pakistan in a ceremony in Islamabad Monday that could ultimately lead to $48 billion in infrastructure projects.

 

Chinese President Xi Jinping (left) greets his Pakistani counterpart Mamnoon Hussain in Islamabad, Pakistan.

For now, $28 billion in spending is planned. China President Xi Jinping made his first state visit to Pakistan to unveil the development program known as the China-Pakistan Economic Corridor; it will include railway upgrades and power plant construction. China and Pakistan share a “mutual antagonism toward India, but their economic ties had lagged behind,” The Wall Street Journal reports.

Xi and Pakistani Prime Minister Nawaz Sharifhighlighted five projects, including a $1.4 billion dam that will deliver 720 megawatts of electricity, and a $1.5 billion solar power park that will add 900 megawatts of power to the grid.

Renaissance Capital analysts Daniel Salter, Charles Robertson, Seki Mutukwa and Omair Ansari write that Pakistan is “an undervalued reform story” and add:

“The government is delivering on privatisations with the Habib Bank stake sale, and initial shipments of LNG [liquefied natural gas] have started to arrive (an important first step in rebalancing the country’s energy mix). On the negative side, the government again delayed the anticipated gas tariff hike until July. … If there has been one theme that has worked well in EM of late it is reform. Pakistan ticks many of the boxes here, yet trades on a far lower valuation (8.4x 12-month forward P/E) than other emerging markets and frontier market reform stories such as Vietnam (13.5x), India (16.8x), Philippines (20.0x), Bangladesh (21.4x) or Sri Lanka (13.4x). We believe Pakistan should be of interest not only to frontier funds, but also to mainstream emerging market investors able to look outside of their benchmark index. We like cement, consumer and, to an extent, banks top-down. Our top picks from our bottom-up coverage are: Lucky Cement(LUCK.Pakistan), DG Khan Cement (DGKC.Pakistan) and Packages(PKGS. Pakistan).”

In February and March, the MSCI Pakistan Index fell by over 20% in dollar terms, and the 13% drop in March was the largest in five years, Renaissance Capital reports. But the MSCI Pakistan Index started to rebound this month, up roughly 9%. So far in April, the iShares MSCI Frontier 100 ETF (FM) is up 4%, the WisdomTree India Earnings Fund (EPI) is down 1.5%, and the iShares MSCI India ETF (INDA) has tumbled 2.6%.