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.
There is a chance that FM’s Pakistan exposure could increase this year, but that scenario could be a double-edged sword. Qatar and the United Arab Emirates, currently a combined 33% of FM’s weight and primary drivers of the ETF’s 2013 upside, will depart for the MSCI Emerging Markets Index in the second quarter. [Frontier Markets Could See Increased Volatility]
That could mean a modest increase in Pakistan’s weight in FM, but some global investors and frontier markets observers have already expressed concern about what impact the loss of Qatar and UAE will have on the frontier markets indices that currently feature large weights to those countries. An oft-cited concern is increased exposure to more volatile countries such as Argentina, Nigeria and yes, Pakistan. [Frontier Markets Losing Some Shine]
With a combine market value of $52 billion, according to the Journal, or barely more than twice the size of LinkedIn (NYSE: LNKD), Pakistan’s equity market is still small. That means it could have plenty of room to run, but it is also means it will be a while before Pakistan represents a noteworthy chunk of FM’s weight.
Pakistan also accounts for 1.2% of the Global X Next Emerging & Frontier ETF’s (NYSEArca: EMFM) weight. EMFM debuted two months ago and has $14.3 million in assets under management.
iShares MSCI Frontier 100 ETF
