Owing to favorable macro-economic indicators, PAK is poised to become one of the highest yielding ETFs in the market. Political stability along with an improvement in the investment climate is expected to rally the capital markets of Pakistan. Moreover, lower than expected inflation numbers are expected to soften the stance of State Bank of Pakistan (SBP) on monetary tightening. It is worth mentioning that the benchmark KSE-100 is trading at 9.6x P/E, which is at a 44% discount to regional markets and accompanied by dividend yield of ~7.3%.
Highlights of PAK ETF
The investments of the fund is in the following equity securities:
Global X Funds – Global X MSCI Pakistan (PAK) is, as of this writing, trading at the NAV of $7.71 with the P/E ratio of 7.67 and P/B ratio of 1.05. Further, the following are the characteristics of the fund:
On the risk side, the fund has the following risk stats:
Economic discipline is imperative for the future
Through IMF program and various reforms undertaken by the current government, the country’s economy is on the path of macroeconomic stability and achieving sustainable growth. The following are the reforms or prospective reforms to be undertaken by the government:
- Adoption of market-based exchange rate by SBP. Monetary tightening in order to keep the inflation rate in check.
- Higher policy rates by SBP has also attracted hot money, worth approximately $1-2 billion to be invested in the high-yielding debt securities of Pakistan. Thus, raising the international foreign exchange reserves of the country.
- Government is endeavoring to limit the primary fiscal deficit. This reinforces fiscal discipline in the revenues and expenditures of the federal and provincial governments. Further, in this regard, the monetisation of fiscal deficit is also being prevented.
- Energy sector and public sector enterprises reforms to bring down the losses incurred by the government owned enterprises.
The investors of PAK ETF need to be cognizant of the above four-point agenda reforms of the government. This is because any deviation from the above-mentioned agenda is going to deter the future gains of the ETF to a large extent.
Improving prospects of the fund constituents.
- Oil and Gas Development Company (OGDC) is going to be the beneficiary of circular debt resolution and energy sector reforms. (This stock constitutes 8.17% of the total holdings)
- Pakistan Petroleum Limited (PPL) is aggressively adding new oil and gas reserves in order to sustain its growth (7% growth expected in next two years). The company has better pricing regime on the discovery of new gas reserves. Moreover, this company is also going to be the beneficiary of circular debt resolution and energy sector reforms. (This stock constitutes 8.32% of the total holdings)
- In financial sector, higher policy rate is going to translate into better core margins. The banking sector is having more exposure to higher yielding PIBs with retirement of lower yielding PIBs. (The financial sector constitutes 28.85 percent of the total holdings.
The investors of PAK ETF need to be cognizant of the above four-point agenda reforms of the government. This is because any deviation from the above-mentioned agenda is going to deter the future gains of the ETF to a large extent. Going forward, I remain bullish on PAK ETF. Thus, “Buy” rating is maintained.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.