Thursday, 23 July 2015

MSCI Pakistan – Add a Little Green to Your Portfolio

MSCI Pakistan (NYSEArca: PAK)
Global X Funds; Pakistan; 25%-30% Upside

Developed and current emerging markets are not offerings returns as high as frontier markets. Pakistan’s economic outlook is improving, thanks to China’s investment, low oil prices and rate cuts. MSCI Pakistan is a decent bet for a frontier market exposure; it’s cheap on relative valuation. 

Developed equity markets continue to trend higher. It is hard to predict the end of the current bull market, but the returns would be limited going forward. S&P trades at a PE of 21.24 while NASDAQ composite is trading around 23 times the trailing earnings. European markets are also rising but the upside seems limited given high multiples. Emerging markets are witnessing a slowdown in growth. High return investments are not easily found in the above mentioned markets under current circumstances. However, there are alternatives for investors with a high risk-appetite: the frontier markets. Frontier markets are small to be classified under emerging markets but they often entail a higher return at a higher risk. One such frontier market is Pakistan, which has started to look attractive. Equity market of Pakistan is trading at a substantial discount and can bring considerable gains to investors. Detailed thesis follows:

Status of Pakistan might be upgraded to an emerging market. Pakistan is up for consideration to be included in emerging markets. MSCI will review for a potential upgrade in June 2016. According to WSJ, Pakistan is liquid and deep enough to be considered as an emerging market. KSE 100 index is one of the best performing equity markets since the financial crisis of 2008. Note that Pakistan meets most of MSCI's emerging market requirements. It is highly likely that Pakistan will be upgraded to the emerging market status. If that happens, the PE multiple of Pakistan's equities will expand resulting in substantial gains for investors.