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1
Global Equity: New Entrants in Emerging Markets
Presented byMahad Farrukh
Gursimran SinghSavva Cherdanstev
2
MSCI Classifications: A Case for Frontier Markets
Portfolio Perspective
Investment Thesis
Macro Analysis
Risk Factors
Conclusion
Valuation
Source: iShares
3
Reclassification of Qatar & UAE
Jun-13Jul-13Aug-13Sep-13Oct-13Nov-13Dec-13Jan-14M
ar-14Apr-14M
ay-14Jun-14Jul-14Aug-14Sep-14Oct-14Dec-14Jan-15Feb-15M
ar-15Apr-15M
ay-15Jun-15Jul-15Aug-15Oct-15Nov-15Dec-15Jan-16
0
2000
4000
6000
8000
10000
12000
14000
16000
QATAR INDEX UAE INDEX
Inclusion in MSCI Emerging
Jun-13Jul-13Aug-13Sep-13Oct-13Nov-13Dec-13Jan-14M
ar-14Apr-14M
ay-14Jun-14Jul-14Aug-14Sep-14Oct-14Dec-14Jan-15Feb-15M
ar-15Apr-15M
ay-15Jun-15Jul-15Aug-15Oct-15Nov-15Dec-15Jan-16
0
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4
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QATAR P/E UAE P/E
Inclusion in MSCI Emer-ging
Portfolio Perspective
Investment Thesis
Macro Analysis
Risk Factors
Conclusion
Valuation
Source: Bloomberg
4
Macro Analysis
Investment Thesis
MSCI Market Classification Criteria
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Criteria Frontier Emerging PakistanA Economic Development
A1: Sustainability of economic development No Requirement No Requirement - B Size and Liquidity Requirements B1: No. of companies meeting the following index criteria 2 3 7 Company Size USD 631 mm USD 1262 mm - Security Size USD 51 mm USD 631 mm - Security Liquidity 2.5% ATVR 15% ATVR - C Market Accessibility Criteria C1: Openness to foreign ownership At least some Significant ++ C2: Ease of capital inflows/outflows At least partial Significant ++ C3: Efficiency of operational framework Modest Good and tested ++ C4: Competitive Landscape High High ++ C5: Stability of institutional framework Modest Modest -/?
Source: MSCI (++:no issues; +:no major issues; -/?: improvements needed)
5
Macro Analysis
Investment Thesis
Companies meeting MSCI Emerging Criteria
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Company Sector Current Weight in MSCI Pakistan
MCB Bank Financials 15.20
Habib Bank Financials 14.79
Lucky Cement Materials 10.08
Oil and Gas Development Energy 9.53
Fauji Fertilizer Materials 8.51
Engro Corporation Diversified1 8.29
United Bank Financials 7.171MSCI classifies Engro Corporation as Materials whereas it is actually a diversified holding company Source: MSCI
6
Investment Thesis
Macroeconomic Overview
Portfolio Perspective
Macro Analysis
Risk Factors
Conclusion
Valuation
Source: Bloomberg
Jan-11M
ay-11Aug-11Nov-11Feb-12Jun-12Sep-12Dec-12M
ar-13Jun-13Oct-13Jan-14Apr-14Jul-14Oct-14Feb-15M
ay-15Aug-15Nov-15
0
0.5
1
1.5
2
2.5
3
3.5
KSE 100 MSCI WORLD
2010 2011 2012 2013 20143.2
3.4
3.6
3.8
4
4.2
4.4
GDP Growth YoY( %)
Jan-11M
ay-11Sep-11Jan-12M
ay-12Sep-12Jan-13M
ay-13Sep-13Jan-14M
ay-14Sep-14Jan-15M
ay-15Sep-15
0
2
4
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16
Inflation Benchmark Rate
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Investment Thesis
Inflation and Currency Performance against USD
Qat
arU
AETa
iwan
Phill
ipin
esCz
ech
Repu
blic
Thai
land
Egyp
t H
unga
ry
Kore
aG
reec
eIn
done
sia
Peru
Pola
nd
Chile
M
alay
sia
Mex
ico
Turk
eyCo
lom
bia
Chin
aIn
dia
Russ
iaSo
uth
Afric
aBr
azil
Leba
non
Om
anBa
hrai
nJo
rdan
Bang
lade
shKu
wai
t Pa
kist
anVi
etna
mN
iger
iaM
oroc
coTu
nisi
aSr
ilank
aEs
toni
aLi
thua
nia
Slov
enia
Bulg
aria
Croa
tiaKe
nya
Rom
ania
Serb
iaM
auriti
us
Arge
ntina
Kaza
khas
tan
-60.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00% -5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
Depreciation against USD Inflation
Portfolio Perspective
Macro Analysis
Risk Factors
Conclusion
Valuation
Source: Bloomberg
8
Macro Analysis
Investment Thesis
Underpricing against Regional Peers on Earnings
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Source: Bloomberg
Paki
stan
Sri-L
anka
Viet
nam
Bang
lade
sh
Kore
a
Taiw
an
Chin
a
Indo
nesia
Mal
aysi
a
Phili
ppin
es
Indi
a
Thai
land
0
5
10
15
20
25
• Currently, P/E of KSE100 is 9.0 against a 5 year Average P/E of 9.62
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Valuation
Macro Analysis
Investment Thesis
Risk Factors
Portfolio Perspective
Risk Factors
Conclusion
Risk Factor Threat Level Description1. MSCI decides not to include Pakistan in
Emerging marketsCurrently, Pakistan is on the review list of MSCI and will be considered for inclusion in Emerging markets this May. Pakistan fulfills all the criteria for emerging markets except stability of institutional framework. This could result in a decision to keep Pakistan in frontier markets. MSCI does not follow all of its requirements strictly (as noticed with Qatar and UAE in the past) and instead, gauges the extent of shortfall. Therefore, we do not expect this to be a major risk.
2. Socio-economic and Political Risk Pakistan is perceived to be a high risk region with respect to security and political stability. The country faces internal and external threats in terms of security and is perceived to lack consistent political leadership which would be capable of maintaining stability.Despite this perception, substantial progress has been made on either sections.
3. Transparency We consider this to be a substantial and constant threat in most countries in the region, including big emerging markets such as India and China.
4. High Volatility Market Frontier markets are generally perceived to be highly volatile which can adversely impact the value of this investment.
10
Macro Analysis
Investment Thesis
Correlation Matrix of Pakistan against GE Holdings
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Country Security SXXP NKY UKX DAX HSI AS51 SMI KOSPI CAC SENSEX STTF SPX KSE100
Europe SXXP 1.00 0.34 0.90 0.94 0.46 0.31 0.74 0.25 0.96 0.46 0.45 0.56 0.16
Japan NKY 0.34 1.00 0.33 0.24 0.45 0.47 0.30 0.53 0.29 0.33 0.43 0.19 0.13
UK UKX 0.90 0.33 1.00 0.82 0.46 0.32 0.66 0.27 0.86 0.44 0.43 0.56 0.16
Germany DAX 0.94 0.24 0.82 1.00 0.37 0.21 0.69 0.17 0.94 0.38 0.39 0.53 0.11
Hong Kong HSI 0.46 0.45 0.46 0.37 1.00 0.52 0.34 0.48 0.40 0.43 0.53 0.26 0.20
Australia AS51 0.31 0.47 0.32 0.21 0.52 1.00 0.28 0.48 0.24 0.34 0.42 0.16 0.22
Switzerland SMI 0.74 0.30 0.66 0.69 0.34 0.28 1.00 0.23 0.71 0.30 0.36 0.43 0.13
South Korea KOSPI 0.25 0.53 0.27 0.17 0.48 0.48 0.23 1.00 0.20 0.36 0.37 0.15 0.17
France CAC 0.96 0.29 0.86 0.94 0.40 0.24 0.71 0.20 1.00 0.40 0.40 0.55 0.15
India SENSEX 0.46 0.33 0.44 0.38 0.43 0.34 0.30 0.36 0.40 1.00 0.39 0.27 0.16
Singapore STTF 0.45 0.43 0.43 0.39 0.53 0.42 0.36 0.37 0.40 0.39 1.00 0.28 0.20
US SPX 0.56 0.19 0.56 0.53 0.26 0.16 0.43 0.15 0.55 0.27 0.28 1.00 0.06
Pakistan KSE100 0.16 0.13 0.16 0.11 0.20 0.22 0.13 0.17 0.15 0.16 0.20 0.06 1.00 Source: Bloomberg
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Macro Analysis
Investment Thesis
Recommendations
Portfolio Perspective
Risk Factors
Conclusion
Valuation
• Strong case for inclusion of Pakistan in SIAS Global Equity Portfolio
• MSCI decision to occur in June 2016
• Changes in IPS will be required:
1. At the time of purchase, countries will be classified as Frontier by MSCI
2. Threshold for maximum exposure to frontier markets should be defined in changes to IPS to aptly manage risk of frontier markets
12
Macro Analysis
Investment Thesis
Appendix I: Institutional Framework in Emerging Countries
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Country Classification Status of Institutional FrameworkColombia Emerging -/?Russia Emerging -/?Egypt Emerging -/?Thailand Emerging -/?
Source: MSCI (++:no issues; +:no major issues; -/?: improvements needed)
13
Macro Analysis
Investment Thesis
Appendix II: Foreign Ownership in Companies
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Company Major Stockholder (Foreign) Share(%)MCB BANK Franklin Resources 9.04% Habib Bank Franklin Resources 2.34% Fidelity Mangament 1.50% Blackrock 0.44% Lucky Morgan Stanley 2.19% Schroder Investment 1.16% Oil and gas Development Franklin Resources 8.09% Lazard asset management 1.02% Engro Corporation Schroder Investment Management 3.99% HSBC Holdings 0.88% United Bank Franklin Resources 3.40%
Morgan Stanley 2.12% Schroder Investment Management 2.96%
Source: Bloomberg
14
Macro Analysis
Investment Thesis
Appendix III: ETF Tracking
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Jul 15Jul 15Jul 15Aug 15Aug 15Aug 15Aug 15Sep 15Sep 15Sep 15Oct 15Oct 15Oct 15Oct 15Nov 15Nov 15Nov 15Dec 15Dec 15Dec 15Jan 16Jan 16Jan 16
30000
31000
32000
33000
34000
35000
36000
37000
11
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KSE100 Index [LHS] PAK ETF [RHS]
Jul 15Jul 15Jul 15Aug 15Aug 15Aug 15Aug 15Sep 15Sep 15Sep 15Oct 15Oct 15Oct 15Oct 15Nov 15Nov 15Nov 15Dec 15Dec 15Dec 15Jan 16Jan 16Jan 16
11.5
12
12.5
13
13.5
14
14.5
15
15.5
16
16.5
1750
1800
1850
1900
1950
2000
2050
2100
2150
2200
2250
PAK ETF MSCI All Pakistan Index
• ETF of Pakistan started trading on April 23rd, 2015. Therefore, data is insufficient to come up with dependable statistics
• However, charts indicate that ETF has been fairly tracking its primary and secondary benchmarks.
Source: Bloomberg
15
Macro Analysis
Investment Thesis
Appendix IV: Governance Scores
Portfolio Perspective
Risk Factors
Conclusion
Valuation
Company LevelHabib BankIndependent Directors 42.9Lucky Bank Independent Directors 12.5Fauji Fertilizer Independent Directors 30.8Oil and Gas DevelopmentIndependent Directors 75.0Engro Corp LtdIndependent Directors 33.3United Bank Ltd.Independent Directors 44.4MCB BankIndependent Directors 7.7
Source: Bloomberg