Why Pakistan Matters for Global Markets

Why Pakistan Matters for Global MarketsBy James Shinn

A failing economy, Islamic radicalism and a growing nuclear arsenal make the country a potential hotbed of tail risk.

As investors scramble for yield in markets awash with central bank liquidity, their eyes continue to be drawn toward the glitter of emerging markets, including those in the Middle East and South Asia, where I’ve been trolling for the past few weeks to probe the links between portfolio strategy and tail risk. Few countries offer as much fertile ground for such ruminations as Pakistan.

The Islamic Republic has its own special charm for diplomats, soldiers and spies, who worry about different risks emerging from the country and its growing stockpile of nuclear weapons. But below the Bloomberg radar, Pakistan may also have the potential to perturbate global financial markets. My time in Islamabad was brightened by winter sunshine and darkened by conspiracy theories.

“Assassinations, mayhem and lack of rule of law in some emerging-market locations often make them a marginal sideshow to global macro markets,” says Thomas McGlade, portfolio manager at London-based hedge fund Prologue Capital. “Even Syria can hardly get the attention of the markets, so the low boil that is constant in Pakistan rarely registers. But it’s the security and nuclear dynamic which could push Pakistan to the forefront.”

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