Pakistan lost its place in MSCI Emerging Markets Index in December 2008. It was included in MSCI Frontiers Market Index in May 2009. Some analysts believe that Pakistan could re-gain the Emerging Market classification (which includes BRIC countries) in a couple of years.
jumped 60% in dollar terms—outpacing global indices as well as MSCI Emerging Market Index and Pakistan’s peers among frontier markets. Pakistan's KSE-100 index was among the top 5 performers in the world in 2013. In recent months foreigners, who kept piling in even as jittery local investors began selling, have bought a net $36m-worth of shares in August, when the PTI and PAT protests were at their height, and a further $53m-worth in September, according to The Economist.
Over the next 6 months $2-2.5 billion of new float is expected to come on stream from Pakistan through government's privatization of assets which should take its MSCI frontier market weightage higher to 9-9.5% with its subsequent effects on passive flows, according to a report in Baron's.
Market classifications of securities from various countries into developed, emerging and frontier indices are made by Morgan Stanley based on a minimum market capitalization and size of free float.
Here's how Morgan Stanley explains it:
In order to be included in a Market Investable Equity Universe, a company must have the required
minimum full market capitalization. This minimum full market capitalization is referred to as the Equity
Universe Minimum Size Requirement. The Equity Universe Minimum Size Requirement applies to
companies in all markets, Developed and Emerging, and is derived as follows:
1. First, the companies in the DM Equity Universe are sorted in descending order of full market
capitalization and the cumulative coverage of the free float‐adjusted market capitalization of the DM
Equity Universe is calculated at each company. Each company’s free float‐adjusted market
capitalization is represented by the aggregation of the free float‐adjusted market capitalization of the
securities of that company in the Equity Universe.
2. Second, when the cumulative free float‐adjusted market capitalization coverage of 99% of the sorted
Equity Universe is achieved, the full market capitalization of the company at that point defines the
Equity Universe Minimum Size Requirement.
3. The rank of this company by descending order of full market capitalization within the DM Equity
Universe is noted, and will be used in determining the Equity Universe Minimum Size Requirement at
the next rebalance.
As of April 19, 2011, the Equity Universe Minimum Size Requirement is
USD 140 million. Companies with full market capitalizations below this
level are not included in any Market Investable Equity Universe. The Equity Universe Minimum Size Requirement is reviewed and, if necessary
revised, at Semi‐Annual Index Reviews.
In a recent interview with Forbes, Mohammad Sohail of Topline Securities in Pakistan has expressed confidence in the country’s capital markets moving forward:
"Things that were held up due to the protests – IPOs, privatizations, reforms, the $800 million share sell of our largest oil and gas company OGDC – have now resumed. When the OGDC deal is executed, I think that will give a very clear signal to the international business community that the protests may still be going on, but investment and business already are operating as usual.
Pakistan is an unexplored market by most outside investors that is not marketed properly. Compared to peers, the market is very cheap. Pakistan’s markets trades at a price/earning multiple of 7.5 times; a 30% to 40% discount to Sri Lanka, Bangladesh, Nigeria and Vietnam. For me, from an investor’s point of view, the next 24 months look very positive for the equity markets."
Increase in Pakistani shares weight in Frontiers Index and expected re-entry in Emerging Markets Index are both welcome developments for Pakistan's economy. As a result of these developments, Pakistan should expect new capital inflows which would strengthen Pakistan's balance of payments position and spur the nation's overall economic growth.
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From Wall Street Journal:
Pakistan returned to the international bond markets Wednesday after a seven-year hiatus, joining a number of other countries around the world raising cash as yield-hungry investors look to put money to work.
Pakistan sold $2 billion of debt, with almost two-thirds going to U.S.-based money managers, two days after Sri Lanka sold a bond for a second time this year. Bankers say Papua New Guinea, Bangladesh and Bhutan are also expected to come to the market this year, hoping to lock in low yields.
The demand reflects both improving economies in these countries and investors' appetite to venture further afield for high returns. The appeal of emerging-market debt has risen as central banks in U.S., Europe and Japan pledge to maintain stimulus measures to keep growth humming, a move that pushes up asset prices across the globe.
"There's been a reversal in the sentiment towards emerging markets over the last two weeks. Everyone loved to hate them, and now, all of sudden everyone is increasing their positions," said Rajeev DeMello, head of Asia fixed income at Schroders Investment Management in Singapore, which has $435.4 billion of assets under management.
Mr. DeMello's fund holds Pakistani bonds and said his funds are interested in buying more, and Sri Lankan bonds.
In March emerging markets saw $39 billion in portfolio inflows from global investors—$24 billion of which was into bond markets—up from $25 billion in February and $5 billion in January, the Institute of International Finance estimated.
Pakistan racked up orders worth $7 billion while Sri Lanka drew over eight times the $500 million on offer with orders of $4.3 billion, with a significant uptick of Asian investors' participation compared with its $1 billion January issuance. The finance ministries of Papua New Guinea, Bangladesh and Bhutan weren't immediately available for comment.
Devesh Ashra, head of Asia debt syndicate at Bank of America Merrill Lynch, said the most important reason these countries are issuing bonds is the expectation that global interest rates are going to rise. The Federal Reserve has started slowing the pace of economic stimulus, meaning it is likely that yields are set to rise as the U.S. economy improves.
^^RH: " Some analysts believe that Pakistan could re-gain the Emerging Market classification (which includes BRIC countries) in a couple of years"
What is the basis for this belief? Can you tell us what the TRIGGERING event or parameter for this switch might be?
I mean a statements like:
1) Pakistan will re-gain Emerging Markets classification ONCE its GDP growth crosses 5% per annum.
2) Pakistan will re-gain Emerging Markets classification ONCE its savings-rate crosses 10% of GDP.
3) Pakistan will re-gain Emerging Markets classification ONCE incoming FDI crosses 1% of GDP
Something else in the form of (1),(2),(3).
HW: "What is the basis for this belief? Can you tell us what the TRIGGERING event or parameter for this switch might be?"
Read the post again to see if you can identify what is triggering a jump in market cap and float size for several securities traded on Karachi stock exchange.
It's a test of your reading comprehension.
Pakistan launched a trade dispute at the World Trade Organization on Wednesday to challenge the European Union's punitive duties on Pakistani exports of polyethylene terephthalate (PET), the WTO said in a statement.
Pakistan says the EU has broken WTO rules in the way that it imposed anti-subsidy duties on PET, which is used in synthetic fibres, plastic bottles and food containers.
Under WTO rules, the EU has 60 days to try to settle the dispute in direct talks, after which Pakistan could escalate the issue by asking the WTO to set up a panel to adjudicate.
Pakistan's exports of PET were worth just over $200 million last year, according to data from the International Trade Center, a U.N.-WTO joint venture. Although its exports have grown, sales to the EU have dwindled in the past few years.
The EU accounted for over 80 percent of Pakistan's foreign sales of PET a decade ago, but less than 10 percent of Pakistani PET exports went to the EU in 2013, a tiny slice of the EU's $4.3 billion imports of the material.
The dispute is the first that Pakistan has initiated in almost a decade and its first against the EU. It previously launched three disputes - two against the United States and one against Egypt, which was settled in 2006.
Pakistan on Saturday postponed indefinitely the planned sale of up to 10% of its majority stake in the country’s largest oil and gas business, officials said, in a blow to the government’s ambitious privatization plans.
Pakistani officials cited falling global oil prices for their pulling the offering on the London and Karachi stock exchanges of shares in Oil and Gas Development Co. Ltd. But there was also a poor response to the offer, analysts said, saying there also appears to be in general a wariness abroad toward investing in Pakistan.
The sale of 10% of the government’s stock in the company had been expected to raise at least $800 million, and it was expected to be the biggest divestment by Prime Minister Nawaz Sharif ’s government since it came into power in June last year. Employees own 10% of the company’s shares and the remainder is listed and traded on exchanges.
The government had planned large-scale sales of shares in as many as 31 state-owned enterprises to boost the country’s foreign exchange reserves and bolster public finances
At the close of trading on Friday, however, bids had come in for just 52% of the Oil and Gas Development’s shares on sale, Privatization Minister Mohammad Zubair told The Wall Street Journal.
‘We are in a very, very difficult environment, primarily [because of] the reduction in oil prices, which have been tumbling…This was hardly the time for this transaction.’
—Privatization Minister Mohammad Zubair
Some investors in London, who asked not to be identified, said they remained concerned about political and economic risk in Pakistan and would be interested only if there were steep discounts in price available.
“We are in a very, very difficult environment, primarily [because of] the reduction in oil prices, which have been tumbling,” said Mr. Zubair told The Wall Street Journal. “This was hardly the time for this transaction.”
Global oil prices have declined for months, with that of the world’s benchmark crude oil, North Sea Brent, down 28% since June.
Mr. Zubair also mentioned recent political unrest as contributing to negative investor sentiment toward Pakistan. The Pakistani energy company’s stock offering was twice earlier delayed by political protests in Islamabad against the government and by a legal challenge to the divestment.
“The oil sector generally is least preferred among foreign investors right now,“ said Atif Zafar, head of research at JS Global Capital, a Karachi brokerage. ”When it (Oil and Gas Development‘s offering) all started, it was a good time. By the time it was realized, it wasn’t.”
Officials said the sale would have been a major boost to Pakistan’s fragile economy, which was hit by political unrest in August, when two opposition leaders, sportsman-turned-politician Imran Khan and Muslim cleric Tahir ul Qadri, marched on Islamabad with thousands of supporters for a sit-in, alleging election fraud and demanding Prime Minister Sharif’s resignation.
From Express Tribune:
Karachi Stock Exchange’s (KSE) benchmark 100-share index increased 369 points to reach 31,299.97 points, Express News reported on Monday.
Since the start of trading today, shares of 200 companies increased while shares of 44 companies declined.
The previous peak of 30,593 points came on November 5 which analysts credited to falling inflation and commodity prices as well as to easing of political tensions.
Official data has showed that inflation had plunged to a 17-month low, raising investors’ hopes that the central bank might slash the basic interest rate in its next review.
The country’s long-moribund economy has shown some glimmers of revival under Prime Minister Nawaz Sharif’s government.
Ratings agency Moody’s upgraded the country’s outlook to ‘stable’ from ‘negative’ in July, citing its improving external liquidity position and commitment to reforms.
With its shiny new articulated buses, freshly dug underpasses and dedicated flyovers, Islamabad’s new public transport system is supposed to be a symbol of a government that gets big things done.
But as a December deadline approaches before thousands of civil servants supposedly start taking the 15-mile Metro Bus journey for their commute into the heart of Pakistan’s capital, the final section of the route along the city’s main avenue is a mess of giant holes and ripped up concrete.
Frantic construction work on the £265m scheme ground to a halt in August when thousands of anti-government protesters, led by opposition politician Imran Khan and a cleric called Tahir-ul-Qadri, flooded into the city.
It is not just an important project that has been held up. The protesters also succeeded in paralysing prime minister Nawaz Sharif’s government.
The industrialist won a landslide victory in 2013 with promises of reviving a dying economy, forcing a meddling army to finally accept the authority of elected civilians, and making peace with India. More than 18 months later and every part of Sharif’s ambitious agenda is seriously off track.
India has responded to Sharif’s peace overtures with an unprecedented upsurge in cross-border firing. At home the government has been badly bruised by ferocious disagreements with the military, which earlier in the year succeeded in forcing the closure of one of country’s most popular private news channels, against the government’s will.
And international investors have been seriously put off by the sight of thousands of protesters overwhelming the government quarter of the capital and smashing their way into the grounds of parliament in late August.
“Before the protests we had a brilliant story to tell about Pakistan,” said Mohammad Zubair Umar, chairman of the privatisation commission.
Last year, 2013, had been a turning point for Pakistan, he said, pointing out that it was the first time a government had survived a full five-year term without being ousted in an army-backed coup. It also saw the first successful transfer of power to another elected government.
“We told investors that we now had the kind of political stability Pakistan never witnessed in its first 60 years,” Umar said.
But many observers feared Pakistan might be reverting to type when Khan descended on Islamabad to protest against the 2013 election, which he claims was stolen from him – something independent election observers are highly sceptical about.
Multimillion-dollar transactions to offload shares in the country’s Oil and Gas Development Company had to be postponed – foreign lawyers and financial advisers stayed clear of the country, let alone Umar’s office, which overlooks the parade ground Khan has taken over for his sit-in.
But despite the damage done, Sharif is determined to regain the initiative. On 4 November he tried to inject some energy into the government’s effort to eradicate polio, which Pakistan has struggled to bring under control. And on Friday he jetted off for a visit to Beijing following the deep embarrassment caused by the decision of China’s president, Xi Jinping, to cancel a trip to Islamabad in the wake of the protests.
Sharif has told his cabinet to press on with implementing unpopular decisions, including weaning the public off unaffordable electricity subsidies as part of an effort to end rolling power blackouts that have badly stunted economic growth.
“His political room to manoeuvre has narrowed and everything that was hard, on the economic reform programme, has got harder,” said one diplomat.
Three Pakistani companies added to MSCI FM small cap index
KARACHI: MSCI, a leading provider of investment decision support tools worldwide, has announced the results of semi-annual index review for MSCI equity indices.
Analysts noted that in the seven months of this year, Pakistan attracted foreign portfolio investment (FPI) inflow of $427 million, which accounting for 20 per cent of the cumulative net inflow of $2.2 billion seen by the frontier markets (FM) during the period.
Although there were no additions or deletions to MSCI FM 100 index during the semi-index review, the MSCI FM small cap index saw the highest additions of three companies from Pakistan.
Currently, the country has 15 companies in MSCI FM index, i.e. OGDCL, MCB, FFC, UBL, POL, ENGRO, NBP, HBL, PPL, PTC, FATIMA, PAKT, KEL, LUCK and PSO.
The small cap index would now include Indus Motors; Murree Brewery and Lafarge Pakistan Cement from Nov 26, 2014.
As a result, Pakistan’s representation in the MSCI FM small cap index would be 23 companies and 12 companies in the main MSCI FM 100 index.
Analysts at AKD Securities observed: “Pakistan’s weight in the MSCI FM 100 index has increased to 7.8pc at the end of Oct’2014, up from 3.8pc six months ago. It is the fourth highest after Kuwait, Nigeria and Argentina with weightage of 23pc, 13pc and 10pc, respectively.”
A rally in Pakistan bonds bodes well for the world’s second-biggest Muslim nation as it prepares to sell global sukuk for the first time since 2005.
The government may issue $500 million of dollar Islamic notes by month-end, Finance Minister Ishaq Dar told reporters in Dubai on Nov. 8, reviving the sale initially scheduled for September. The yield on the nation’s conventional five-year U.S. currency debt sold in April dropped to a five-month low of 6.16 percent and Union Investment Privatfonds GmbH is predicting 6 percent for a similar-maturity sukuk.
Investors have sent the benchmark stock index to a record and the rupee to its strongest in more than two months as they focus back on the economy as Prime Minister Nawaz Sharif overcame pressure from opposition members to step down in August. Global sales of sukuk are heading for the worst fourth quarter since 2008, aggravating a shortage of Islamic securities that may support demand for Pakistan’s offering.
“The macroeconomic outlook of the country has vastly improved,” Vasseh Ahmed, chief investment officer of Faysal Asset Management Ltd., which oversees $85 million in Karachi, said in a Nov. 11 e-mail. “There is expected to be substantial interest owing to the lack of investment avenues for Islamic investors.”
Worldwide sales of Islamic bonds dropped 81 percent this quarter to $2 billion from the previous three months, data compiled by Bloomberg show. Issuance climbed 11 percent in 2014 to $38.9 billion, trailing 2012’s record $46.8 billion total.
Pakistan tapped the international debt market in April for the first time since 2007. It sold $2 billion in total of 7.25 percent non-Shariah-compliant notes due in 2019 and 10-year 8.25 percent bonds whose yield was at a three-month low of 7.46 percent, data compiled by Bloomberg show. Demand exceeded the amount on offer by 14 times.
The nation has no global sukuk outstanding, only local-currency Shariah-compliant notes that were last issued in June.
A five-year note will pay from 6 percent to 6.5 percent and 10-year securities 7 percent to 7.5 percent, Mohammed Sohail, Karachi-based chief executive officer at Topline Securities Pakistan Ltd., said in a Nov. 11 e-mail.
The South Asian nation’s foreign-exchange reserves totaled $14 billion in September, compared with $8.7 billion at end-2013, central bank data show. The fiscal deficit narrowed to 5.8 percent of gross domestic product in the 12 months through June, from 8.2 percent the previous year, according to official data on June 3.
“The key factor will be the domestic political situation,” Sajjad Anwar, chief investment officer at NBP Fullerton Asset Management Ltd., which manages $456 million, said by phone on Nov. 11 from Karachi. “The economy is in better shape now and the response to the sukuk will be very encouraging.”
The nation, which is rated below investment grade at B- by Standard & Poor’s, is still likely to attract investor interest because of its higher yields. Qatar’s global Shariah-compliant debt due in 2023 yields 2.99 percent, while Malaysia’s 2021 sukuk pay 2.93 percent, according to data compiled by Bloomberg.
Pakistan has engaged in economic reforms to meet conditions of an International Monetary Fund bailout. The Washington-based lender said in a Nov. 8 statement that it will seek board approval to release $1.1 billion in loans in December. The reforms are “broadly on track” with growth forecast at 4.3 percent in the fiscal year ending June 2015, the fund said. GDP increased 4.1 percent in the last financial year.
“Pakistan is a very well known name to the sukuk investor community,” Union Investment’s Dergachev said in a Nov. 11 e-mail. “It still offers a very attractive yield compared to other sukuk issuers both in the sovereign and corporate space and that matters in a low-yield environment.”
Pakistani stocks today set a new record with benchmark KSE-100 scaling the 32,000-point level for the first time in its history as investors cheered the recent interest rate cut by the country's banking regulator......Analysts say foreign fund managers showed exceptional interest in the market and it is expected that the bullish trend may continue at the bourse in the coming days.
KARACHI: The inflows of foreign direct investment (FDI) in Pakistan surged by a significant 47.1 percent to $423.8 million in the first four months of the current 2014/15 fiscal year, the central bank said on Monday.
The FDI over tripled during the month October to $254.3 million against $57 million in the same period last year due to improvement in political environment. However, portfolio investment in the month was recorded at negative $2.2 million as against $33.5 million in September last year.
China contributed $167.3 million to the total inflows in the month.
Ahsan Mehanti at Arif Habib Corporation said the inflows that were on halt in the previous months due to political uncertainty materialised in October.
“The government also expedited its efforts after witnessing political ease in October. Energy, auto and textile sectors observed some expansions during this period, which increased the inflows.”
Schehzad at Lakson Investments said there were expansions, particularly in the telecom sector after the award of 3G licence, which invited inflows.
“There has not been any significant shift in the mindset of the foreign investors or installation of any mega project in the country. There has been small-scale expansion in the working capital in oil & gas and power sectors, which improved the numbers,” Schehzad added.
Overall, foreign private investment increased by 66 percent to $600.1 million in the period under review, primarily because of huge surge in the FDI flows during October.
Portfolio investment in the four-month (July-October) period was recorded at $176.3 million as compared to $72.2 million in the same period last year.
Schehzad said the stock market is performing and returns are impressive, which is attracting investment. Moreover, the increase of Pakistan’s market weightage to 7.02 percent in the MSCI FM index resulted in heavy portfolio investment.
The United States remained the largest contributor in the FDI with an investment of $100.1 million during the four-month period; followed by Switzerland with $93.9 million and Hong Kong with $59 million.
As far as the portfolio investment is concerned, the US injected $162.2 million in the country’s equity market; followed by Switzerland with $99 million, while Norway pulled out $71.1 million from the country’s bourse.
#MSCI review: #Pakistan may rejoin emerging markets in 2016
MSCI, a leading provider of international investment decision support tools, said on Wednesday it may reclassify the MSCI Pakistan Index from ‘Frontier Markets’ to ‘Emerging Markets’ next year.
“We will add the MSCI Pakistan Index to the review list for its potential reclassification to Emerging Markets as part of the 2016 Annual Market Classification Review,” MSCI said.
Global institutional investors use different MSCI indices — such as frontier, emerging, China and US markets – to create balanced portfolios aimed at generating maximum returns while keeping in view their overall risk appetite.
The decision may appear to be a routine reclassification of economies by MSCI, but it has the potential to dramatically change dynamics of the Pakistan equity market: MSCI Emerging Market Index is tracked by global funds worth about $1.7 trillion, according to Bloomberg data.
“Not only the size of passive fund flows will increase, many large Emerging Markets funds may return to Pakistan,” says Topline Securities investment analyst Muhammad Tahir Saeed about the possibility of the elevation of the MSCI Pakistan Index to Emerging Markets next year.
In its brief commentary on the decision, MSCI said most accessibility criteria of the Pakistani equity market meet the MSCI Emerging Markets standards, except for some potential issues with the stability of the institutional framework.
“The Pakistani equity market has grown significantly and its liquidity has greatly improved. As a result, concerns about the potential for failing to meet size and liquidity criteria should there be a negative market event have receded,” MSCI noted.
Pakistan was part of the MSCI Emerging Markets between 1994 and 2008. However, the temporary closure of the Karachi Stock Exchange in 2008 led MSCI to remove it from the Emerging Markets and classify it as a “standalone country index”. MSCI made Pakistan a part of the Frontier Markets Index in May 2009 and it has remained as such since then.
The indexer says the MSCI Pakistan Index may potentially see its number of constituents decrease in the event of its reclassification to the Emerging Markets status. The reason for the reduction in the number of constituents is the application of more stringent ‘investability’ requirements for the MSCI Emerging Markets Index.
Pakistan currently has as many as 16 companies in the MSCI Frontier Markets Index, namely Engro Corporation, Fatima Fertilizers, Fauji Fertilizers, Habib Bank, Hubco, Indus Motor, K-Electric, Lucky Cement, MCB Bank, National Bank, OGDC, Pakistan Oilfields, Pakistan Petroleum, PSO, PTCL and United Bank.
Read: Weekly review: KSE-100 drops 703 points after insider trading probe
Based on a simulation using current data, MSCI believes the number of constituents will decrease from 16 to only six in the case of the possible reclassification. The removal of 10 companies from the index will result in a drop of 32% in its market capitalisation.
Notwithstanding the immediate drop in the index market capitalisation, the possible reclassification is expected to attract greater foreign inflows to the Pakistani equity market. “Although Pakistan’s weight in the Emerging Markets will be small, (the size of) funds tracking Emerging Markets is many times higher than (that of) funds tracking the Frontier Markets,” Tahir said.
Pakistan In Line For Upgrade to Emerging Market Status
Index provider MSCI has revealed it plans to consider upgrading Pakistan from frontier- to emerging-market status next year.
Citing “a number of positive developments over the course of the past 12 to 18 months,” MSCI said it would include Pakistan on its 2016 review list.
News that Pakistan is being considered for inclusion in the MSCI emerging markets index will be seized upon by a government desperate for international recognition of what it says are its achievements in stabilizing the Pakistani economy.
The government of Prime Minister Nawaz Sharif, who came to power in June 2013, inherited low growth, high inflation, a foreign-exchange reserve crisis and crippling electricity shortages. Since then, inflation has dropped sharply and foreign exchange reserves are more comfortable.
The government is now on a mission to boost economic growth from the anemic 3% that it inherited to around 7% by the end of its five-year term. The IMF expects GDP growth to hit 4.3% this year and rise to 4.7% in 2016.
Pakistan has already achieved recognition among frontier-markets analysts, including Renaissance Capital, which describes the country as “the best undiscovered investment opportunity in emerging or frontier markets.”
However, considerable challenges remain. The country is woefully short of electricity, for example, while plans to seriously boost the paltry tax revenues are also yet to come to fruition.
Tax revenues currently stand at around 10% of GDP.
The IMF, which rescued Pakistan with a $6.6bn loan program in 2013, agrees that progress is being made. The multilateral said last month that “strong implementation of reforms… will transform Pakistan into a dynamic emerging market economy.”
Pakistan is banking on help from China, which has a $46bn investment plan intended to address the country’s energy deficit and put in place other infrastructure for industrialization that it is hoped will change Pakistan’s economic trajectory.
The Karachi stock market has delivered stellar performance in recent years. Since the May 2013 election, it has gained more than 70%. News on the possible inclusion in the emerging markets index—a decision on that will be made by MSCI next year—had little immediate impact on the market on Tuesday.
Pakistan was last in the MSCI emerging markets index in 2008 and brokers said its re-inclusion would be positive.
“Not only size of passive fund flows will increase, many large [emerging markets] funds may return back to Pakistan,” Karachi brokerage Topline Securities said in a note on Tuesday.
#Pakistan and #Vietnam: Frontier Market Fund Managers' Favorites #MSCI #ETF #FM #PAK http://www.barrons.com/articles/pakistan-and-vietnam-frontier-fund-favorites-1447479547# … via @barronsonline
Frontier markets are emerging markets’ smaller, more fragile siblings, but these tiny economies–ranging from Africa to the Middle East and on to the fringes of Asia–usually offer the prospect of more growth.
We reached out to two frontier fund managers to ask where they are picking stocks. Vietnam and Pakistan are two common favorites. A third attractive country knocking on the emerging market category’s door is Saudi Arabia.
Both emerging and frontier countries offer cheaper valuations than developed markets. But frontier markets, based on Standard & Poor’s Frontier BMI Index excluding Gulf Cooperation Council countries in the Middle East, boast higher margins, lower leverage, and a higher yield—nearly 4%—to compensate for their volatility. Earnings growth over the past three years in frontiers, at 13%, has been better than in emerging markets, at 11%.
Neither market is faring well. The MSCI Frontier Markets Index includes 27 countries, from Vietnam to Nigeria. The iShares MSCI Frontier 100 ETF (ticker: FM) is down 12% in 2015. The MSCI Emerging Market Index is made up of 23 countries from China to Peru; the iShares MSCI Emerging Markets ETF (EEM), is down about 15%.
The managers like smaller companies that get dwarfed in the indexes. Asha Mehta, a frontier-market portfolio manager at Acadian Asset Management in Boston, likes the energy-intensive cement sector in Pakistan. It benefits from the lower price of crude, and regulation that supports the private sector. Valuations are attractive, at roughly nine times trailing earnings.
SHE ALSO LIKES THE SAUDI MARKET, though it’s nearly twice as expensive as Pakistan. Surprisingly, it’s not as closely correlated with the oil industry, which is mostly state controlled. Mehta likes petrochemicals, which benefit from lower oil prices; as well as telecom and infrastructure, which benefit from a growing, young population with increasing spending power. The Saudi market is neither emerging nor frontier, though its liquidity is greater than all frontier markets combined. One catalyst: Mehta thinks the Saudi market could be added to the MSCI Emerging Market Index as soon as 2017, and that as EM-indexed funds pile in, Saudi market investors could enjoy big gains. A key risk is the country’s growing budget deficit as oil prices stay low. But the country has ample reserves to fund social programs and infrastructure projects.
How to play them? Small, illiquid ETFs include the Global X MSCI Pakistan ETF (PAK) with assets of just $5.6 million, and the just-launched iShares MSCI Saudi Arabia Capped ETF (KSA), at about $5 million.
And then there’s Vietnam. Valuations are getting pricey, at about 16 times trailing earnings, but Vietnam is expanding as the manufacturing alternative to China. Vietnam is the largest country weighting in the Frontaura Global Frontier Fund, a hedge fund managed by Nick Padgett in Chicago. Vietnam’s trade deals in Europe, and its inclusion in the Trans-Pacific Partnership, put the country in the best economic position Padgett has seen in years.
“Frontier markets are where emerging markets were 20 to 25 years ago,” Padgett says. “It is a long-term investment and it is not right for everyone. You can’t sell at the wrong time.”
#Pakistan stock exchange expects $1 bln of #power IPOs in 2017 and 2018. #loadshedding #energycrisis http://dailym.ai/1TyKvKL via @MailOnline
Pakistan's stock exchange could see initial public offerings of power sector projects amounting to some $1 billion in 2017 and 2018, the bourse's managing director said on Monday.
He also said he also expected Pakistan to regain its stock index emerging market status this year.
Referring to IPOs in the power sector, Nadeem Naqvi told Reuters in an interview:
"The projects that have had financial close and are under construction now, the tendency is that - once they get commissioned - that is the time they come onto the market to restructure their debt-equity ratio, so about $1 billion will come in."
Index provider MSCI said in March it was seeking feedback from investor on reclassifying Pakistan stocks to emerging market status from its current frontier market status - a less liquid and riskier subset of stocks.
The decision to move Pakistan back to the emerging category - from which it was dropped in 2008 - is due in June 2016.
Naqvi said he expected Pakistan to regain its emerging market status soon, if not in June then in December, adding he expected to see money coming in from abroad in anticipation of the decision.
"We saw that in the case of Qatar or the United Arab Emirates, approximately $400 million came in within 6-8 months of the announcement, and the market there is relatively narrow," he said, speaking on the sidelines of a Renaissance Capital investment conference.
"Our market is much more broader, but given Pakistan's risk factor ... I will be very happy if we get about $200-250 million to come in - now this would be the initial arbitragers which would position themselves for the index flows."
Currently, around 30 percent of the freefloat listed on the country's stock exchange was held by international institutional portfolio investors, said Naqvi, adding this would inevitably rise once Pakistan was reclassified.
"Anywhere between 40-45 percent (of foreign ownership) would be a number I would be comfortable with, anything beyond that it becomes risky because the volatility will increase."
He also expects the market capitalisation, currently at $71 billion, to rise above $100 billion in the next five years, thanks to IPOs and share valuations.
"Pakistan's discount against emerging markets is huge, and I think we will be seeing a narrowing of that discount, so even though the global valuations are not going to expand, Pakistan's discount is going to narrow, and there we are going to see that in the market cap."
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