PAK ETF Surging On MSCI Upgrade

Pakistan forayed into one of the world's most popular emerging markets equity indices – MSCI Emerging Markets Index. The Pakistan stock market reacted positively to the news and reached record levels since the announcement of MSCI Inc. (NYSE:MSCI) , the key provider of global equity indexes. In fact, the sole ETF tracking Pakistan –MSCI Pakistan ETF (AX:PAK) – also gained 4.6% in the last 5 days (as of June 20, 2016) (read: Emerging Market ETFs in Focus on MSCI Index Review).

Pakistan has managed to get the MSCI upgrade thanks to high capital mobility and improved liquidity. Earlier this month, MSCI refrained from adding Chinese A shares in its emerging market index due to persistent concerns pertaining to the Chinese economy and lack of accessibility (read: MSCI versus Goldman: A-Shares ETFs in Focus).

With the MSCI upgrade in Pakistan’s kitty, several analysts are of the view that it will lead to a significant boost in foreign investment after the reclassification of Pakistan to the emerging-markets index, which is expected to will in May 2017.

Pakistan is by and large an untapped Asian market for U.S. investors. The country’s equity market had a bad start to 2016 thanks to the global sell-off and foreign investment outflow primarily from the oil and gas sector.

However, the country has been working on a turnaround. The country’s economy is growing at a decent rate of approximately 4.5% per annum. As per a California software company, NetSol Technologies, the country’s 190 million population with more than 50% being under 25 years of age could also act as a key catalyst to long-term growth.

In a review of Pakistan’s economic program, the IMF positively stated that the country is on a growth trajectory and is expected to benefit from low oil prices and strong investment due to the implementation of the China Pakistan Economic Corridor (CPEC). The aim of CPEC is to boost Pakistan’s infrastructure and its industrial sector (read: Can Emerging Market ETFs Sustain the Rally?).

However, as a caveat, we would like to remind investors that like many other markets, Pakistan is also fraught with political tensions, which might hurt the stock market’s potential to outperform at any given time. Additionally, stocks in developing countries generally have smaller market capitalization and lower levels of liquidity than large emerging markets. So, investors planning to invest in this market should have a relatively high risk tolerance.

Keeping these points in mind, we highlight the MSCI Pakistan ETF. This ETF looks to track the MSCI All Pakistan Select 25/50 Index which holds about 36 securities in its portfolio. The fund charges 92 basis points a year. The portfolio is heavily invested in financials at 29% of assets, basic materials (29%) and energy (19%). The top three companies of the fund have almost one-third exposure. The fund has total assets of $9.1 million with paltry volumes of 5,000 shares (read: Pakistan ETF in Focus on Growing Prospects).

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