The first pure-play Pakistan ETF offers a unique investment opportunity.
Over the last several years, ETFs have become an increasingly popular tool for U.S.-based investors looking to access emerging markets stocks. While the first generation of exchange-traded products covered some of the world’s largest developing economies, more recent innovations have opened up smaller and lesser-known markets.
One such fund is the Global X MSCI Pakistan ETF (PAK), which replicates an index comprising the largest and most liquid public companies in Pakistan. In this case, that includes several banks and oil companies; PAK’s largest holdings include MCB Bank, Oil & Gas Development Company, and Habib Bank.
The Case for Pakistan
Pakistan is classified as a frontier market, with a per capita GDP of less than $1,000. Its total GDP of approximately $250 billion makes it one of the world’s 50 largest economies and places it ahead of several other countries with dedicated ETFs, including Greece, Peru, New Zealand, and Vietnam.
Pakistan is often overshadowed by neighboring India, which has a larger population, a stronger economic growth rate, and higher per capita GDP. But Pakistan is also a massive country — it is home to nearly 200 million people — that is expected to expand considerably over the next several decades.
Like many frontier economies, Pakistan has enormous potential that has been held in check by several obstacles. Pakistan is the world’s sixth-most populous country — meaning that there is a huge potential market — but in many cases lacks the infrastructure needed to support a modern economy. Specifically, the lack of sufficient power and infrastructure is estimated to be worth several percentage points of annual GDP growth to Pakistan’s economy.
There is some optimism that investments from China will unlock some of the country’s economic potential. Beijing has indicated that it plans to spend nearly $50 billion on infrastructure projects in Pakistan as part of an effort to connect China with parts of Europe. That would represent a significant portion of the overall GDP and could fast forward the country’s development.
There are other reasons to be optimistic about Pakistan as well. Within the country, sales of automobiles and cement have jumped recently. And Pakistan has benefited from reduced oil prices, which have significantly reduced spending on imports and helped improve the fiscal situation.
Like many emerging markets ETFs, PAK has a heavy allocation toward the financial and energy sectors; these two account for nearly 60 percent of total assets. Other stocks in the Pakistan ETF include materials stocks such as fertilizer and cement companies and electrical utilities.
Many PAK components trade at relatively low price-to-earnings ratios and offer attractive dividend yields, especially considering the country’s enormous growth potential. The table below shows the top 10 holdings in PAK:
Pakistan’s primary stock market is the Karachi Stock Exchange, which was founded in 1947. As of May 2015, there were 582 companies listed on the KSE with a total market capitalization of approximately $70 billion. There are two smaller exchanges in Pakistan as well, including the Lahore Stock Exchange and the Islamabad Stock Exchange.
PAK joins several other ETFs offering exposure to the group of countries identified as the “Next Eleven” by Goldman Sachs economist Jim O’Neill. These countries, along with the BRICs, are expected to have the potential to become the world’s largest in the 21st century. Other N-11 countries with ETFs include:
- South Korea (EWY)
- Indonesia (IDX)
- Mexico (EWW)
- Turkey (TUR)
- Philippines (EPHE)
- Egypt (EGPT)
- Nigeria (NGE)
- Vietnam (VNM)
There aren’t currently U.S.-listed ETFs offering exposure to Iran or Bangladesh.
About the Author: Michael Johnston
Michael Johnston is the Senior Analyst for All Emerging Markets, and also serves as the COO of parent company Poseidon Financial. His investment expertise has been featured in The Wall Street Journal, Barron’s, and USA Today, among other publications. He resides in Chicago.