A High-Flying, Hard-to-Access Market

The fifth-best equity market in the world last year is arguably a surprise to many investors. That honor goes to Pakistan.

That is correct. In local currency terms, stocks in Pakistan gained 49.4% last year, topping the S&P 500, every benchmark index in Europe and plenty of other emerging and frontier markets along the way, according to Bespoke Investment Group.

Although plans were filed several years ago for a dedicated Pakistan ETF, the fund has yet to come to market, leaving daring investors with few options for accessing the frontier market that shares a border with India. However, evidence suggests that global are investors are increasing exposure to Pakistani equities and debt in the wake of increased political stability in the often volatile country.

“Flows from foreign investors into Pakistan reached $283 million from the beginning of May, the month of the election, to the end of 2013,” the Wall Street Journal reported, citing the National Clearing Company of Pakistan. The Journal went on to note “global investors have also snapped up Pakistani government bonds with yields, which move inversely to prices, falling to 7.54% recently from as high as 11.69% in April on the 10-year bond.”

For now, ordinary but daring investors looking to get even a sliver of upside in Pakistani stocks have to rely on the iShares MSCI Frontier 100 ETF (NYSEArca: FM). FM gained 23.7% and saw inflows last year as comparable emerging markets funds generated negative returns and were stung by outflows. The ETF currently allocates 4.42% of its weight to Pakistan, making the country FM’s sixth-largest geographic exposure, 75 basis points behind Argentina and 53 basis points ahead of Kenya, according to iShares data.