More Encouraging Signs For The Pakistan ETF

Among ex-US investable markets, few are regarded as being as rough and tumble as Pakistan. However, Pakistani equity markets have rewarded investors for taking on the perception of increased risk.

Over the past year, the Global X MSCI Pakistan ETF PAK, the lone U.S.-listed exchange traded fund dedicated to Pakistani stocks, is up 35 percent as the country's stock market is higher by 50 percent over that period. During those 12 months, no Asian equity market outperformed Pakistan.

Much of the enthusiasm for PAK and Pakistani stocks revolves around Pakistan's upcoming ascent to emerging markets status. The country is currently classified as a frontier market by index provider MSCI. Last year, MSCI decided to elevate Pakistan to emerging markets status. Pakistan becomes the first frontier market since Qatar and United Arab Emirates several years ago to earn the prestigious frontier-to-emerging promotion.

“MSCI also said that the MSCI Pakistan Index will be reclassified to Emerging Markets status, coinciding with the May 2017 Semi-Annual Index Review,” MSCI said in a statement.

Pakistan's GDP is growing, providing another boost to the country's stocks, but other issues linger that could give international investors pause.

“Perhaps this is because annual GDP growth, having languished below 4% from 2008 until 2013, is now back to the long-term average of around 5%. Poverty has fallen and the urban middle class is growing,” according to The Economist.

From an investment point of view, Pakistan's efforts to eliminate blackouts could benefit PAK. The ETF allocates over 53 percent of its weight to the materials, energy and utilities sectors.

Another selling point for investors considering PAK is that Pakistani equities are historically not as volatile as many investors would expect and the market isn't highly correlated to other major global equity benchmarks. The annualized volatility for the MSCI All Pakistan Select 25/50 Index, PAK's underlying index, is 14.3 percent compared to 13.1 percent for the MSCI ACWI Index, according to Global X.

However, investors must acknowledge the risks before embracing PAK's potential rewards.

“Despite all the good news, however, Pakistan’s progress remains unsure. Terrorist attacks, bombings, murders, kidnappings and brutal state retaliation continue at a brisk pace. Pakistan’s powerful military remains dominant and its secret services opaque,” reports The Economist.