PAK: Your Ticket To The Hidden Gem In Emerging Or Frontier Markets

By | July 7, 2015

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Investors look for exposure to the frontier markets to diversify their portfolios, but have shied from investing in Pakistan. Although Pakistan attracts a lot of negative news, its economy is improving while the local stock market remains one of the top performing in the world. Pakistani stocks can be a great diversification tool for U.S. investors as they offer zero correlation with the S&P-500. The recently launched Global X MSCI Pakistan ETF gives U.S. investors exposure to this market. Investors look for exposure to the frontier markets to diversify their portfolios, given some of these markets have demonstrated little to no correlation with the S&P-500, but most steer clear of Pakistan. In the media, the country’s name is often followed by Osama bin Laden, Taliban, sectarian violence, protests and blackouts. However, Pakistan has also been making significant progress on the economic front and may very well be, in the words of Renaissance Capital’s chief economist Charlie Robertson, “the best, undiscovered investment opportunity in emerging or frontier markets.” Pakistan was created back in 1947 following its partition with India. But unlike its bigger neighbor, the political setup in Pakistan has been far from stable, thanks to corrupt politicians and frequent military takeovers. However, democracy has been taking hold following the departure of the last military ruler Pervez Musharraf in the 2008 general elections. In 2013, for the first time in its turbulent history, a civilian government successfully completed its term in office and transferred power to another. Those elections paved the way for the pro-business politician Nawaz Sharif to form a government. Sharif immediately moved to stabilize the economy, bolster public finances, lift foreign reserves and increase infrastructure spending. Although there is significant room for improvement, so far, the Pakistani government’s performance has been impressive, which was also acknowledged by the IMF. Besides, the country has received positive commentary from Moody’s and Standard & Poor’s. The two rating agencies have recently upgraded Pakistan’s credit rating. Betting on Pakistan’s future is its strongest ally China which has planned to inject $46 billion into South Asia’s second leading economy. China’s confidence stems partly from Pakistan’s latest, and perhaps its biggest, military offensive against the local militants. The country’s security situation, which has been one of the biggest concerns for foreign investors, has improved dramatically. Last year, Pakistan witnessed the lowest number of civilian casualties in terrorist attacks over the last seven years, and the number has improved considerably this year. Meanwhile, Pakistan’s economic growth has improved from 3.7% in 2013 to 4.1% in 2014. The economy currently appears to be posting its strongest growth since the global financial crisis while inflation has been slowing down over the last twelve months, dropping to their lowest level since 2013 of 2.1% in April due in part to the slump in oil prices. The foreign exchange reserves on the other hand, have climbed to their highest level ever of $18.2 billion. Meanwhile, the Sharif government has been doubling down on the construction and infrastructure sector. This has led to a construction boom which is driving the economic growth. As per data from Bloomberg, in the last fiscal year, the nation’s cement stocks have climbed by 57%, outperforming the benchmark index by three times. For the current fiscal year, the government has raised infrastructure spending by 27% to Rs 1.5 trillion/$14.74 billion, which will play an important part in fueling the country’s growth. As per IMF’s projections, growth is expected to tick up to 4.5% in the current fiscal year beginning July 1. With improving economic outlook, Pakistan’s stock markets have rallied. The Karachi Stock Exchange, the nation’s biggest and most liquid market, has generated one of the highest returns in the world over the last five years. During this period, the KSE 100 index has climbed by a whopping 200%. For the fiscal year ending June, the benchmark KSE-100 index has climbed by 14.9%, becoming one of the top performing markets of the world, despite declines coming from oil and gas, tobacco, telecom and banking sectors. Despite the rally, Pakistani stocks are still priced at a discount to their MSCI frontier market peers Bangladesh, Sri Lanka, and Vietnam. A great way for U.S. based investors to gain direct exposure to Pakistani stock markets is through the recently launched Global X MSCI Pakistan ETF (NYSEARCA: PAK ) – the only ETF that is tracking this frontier market. This can be a good diversification tool, since Pakistani stocks showed zero correlation with the S&P-500 last year. The $2.3 million fund, which charges just 0.88%, gives investors exposure to 33 of Pakistan’s leading companies, most of which operate in the financial, energy and materials sector. The fund’s top holdings include two of the country’s largest banks – MCB Bank and Habib Bank-as well as the top E&P company OGDCL, leading chemical fertilizer producer Fauji Fertilizer and the biggest producer and exporter of cement Lucky Cement. These five companies, which give Global X MSCI Pakistan ETF exposure to four diverse sectors, represent 44% of the fund. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News

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