Pakistan used to a frontier market according to MSCI classification. However on June 1, 2017 the index provider reclassified the country as an emerging market and now the country is a constituent of the MSCI Emerging Markets Index.

I recently came across an article in the BBC that discussed the story of Mattias Martinsson’s investment adventures in the country’s equity market. From the article:

The MSCI Emerging Markets Index is made up of 23 high-growth economies including India, China and Brazil.

Pakistan’s main index, the KSE 100 has consistently outperformed the index.

If you had invested $100 into the KSE in January last year, it would now be worth $164. If you had put it into the MSCI, it would only be worth $137. That’s a success that helped make the case for it to be included.

Being in the Emerging Markets Index is a reputational reassurance to investors about the growth prospects and transparency of companies in that country.

Pakistan used to be a part of the index, but was downgraded to frontier market because of the exchange’s decision to shut down for four months in late 2008 after prices dropped dramatically. That meant foreign investors couldn’t get their money out.

“We were kicked out in 2008 after the financial crisis because of measures Pakistan took at the time to stop foreign funds from fleeing the country. Obviously foreign investors got a rude shock,” says Nadeem Naqvi, the Karachi Stock Exchange’s managing director.

“We did a lot of lobbying and reforms to get re-included again into this index,” he tells me from Karachi. And he assures me and investors, that the KSE will be a liquid market.

“Parliament passed the Pakistan Stock Exchanges Act in 2012, which has improved corporate governance and reforms to prevent a reoccurrence of what happened in 2008,” he says.

Source: A long term view: The man who took a chance on Pakistan, The BBC, June 1, 2017

The KSE-100 Index is the benchmark index of Pakistan. It has soared from under 1,300 in 2002 to close at 48,555 on June 2nd. The long-term return of the index shown in local currency is indeed astonishing.

Click to enlarge

Source: FT

The addition of Pakistan into the MSCI Emerging Market will provide addition spotlight and exposure of the domestic equities to global investors.

Currently only one Pakistani company trades on the OTC market. Pakistan Petroleum seems to trade rarely under the ticker PKKKY.

For US investors, looking to gain exposure to Pakistan, the Global X MSCI Pakistan ETF (PAK) offers a simple and easy option.The fund has an asset base of just $27 million and offers exposure to 41 of the largest and most liquid firms. Similar to other emerging countries, financials have the largest weighting in the fund with about one-third of the assets allocated to this sector.

Download: Global X MSCI Pakistan ETF Factsheet (in pdf)

Disclosure: No positions