BREAKING NEWS: After Goldman Sachs’ N-11, and like their famed BRICS, Pakistan is now included a new fast-growing-economy category called VARP. This decade, VARPs are poised to provide rapid returns for investors, says CNBC in a report.
In a report titled, After the BRICs, it’s time to focus on the VARPs, the CNBC says that after Trump’s desire to create a so-called new world order, free trade and emerging markets in BRICS could suffer.
Investors now need to find pockets of opportunity in other frontier markets: Time to introduce VARP.
VARP – Vietnam, Argentina, Romania and Pakistan – represents a collection of geographies, languages, histories and business cultures with one thing in common: they each offer major growth opportunities, says CNBC.
The VARP economies are characterised by strong economic growth, all within the 3 percent-6 percent range, with a young demographic of workers keen to spend money.
Since it’s election year, political instability in Pakistan remains a cause of concern. The country ranks 14th on Fragile States Index.
Will economy be a worry too? In a recent country assessment, London’s The Economist Intelligence Unit predicts that government expenditure and CPEC infrastructure investment will support economic growth.
In another piece in The Washington Post, titled Beyond the headlines of terrorism, Pakistan’s economy is on the rise, the writer says: A bullishness has led Pakistan to enter the emerging-markets acronym vernacular. One of the latest post-BRICS acronyms of rising economies making the rounds: VARP, for Vietnam, Argentina, Romania and Pakistan. Yes, that Pakistan.
By GDP PPP, Pakistan is set to become 20th largest economy in 2030 and 16th largest by 2050, according to a recently released Long View report by PwC.
This growth optimism resonates with other independent forecasts by Harvard’s CID and BMI Research UK for the next 10 years.
The bright side of Pakistan economy
In another report, titled Pakistan to drive frontier investing? by Stefanie Eschenbacher in International Adviser says the acronym VARP is popping up, led by an increasing interest in Pakistan investment.
Stefanie Eschenbacher’s piece is reproduced below, with thanks to International Adviser.
VARPs are the new BRICS
“The VARP economies are over 13 times smaller than the BRICS and therefore we do not expect them to help drive the global economy in the same way, or to generate the same levels of returns for investors,” said Tim Love, investment director for emerging market equities at GAM.
“However, these markets can offer a deeper dimension to an emerging markets portfolio with potential attractive risk returns – because of their diversity.”
Pakistan’s travel infrastructure
Magna New Frontiers Fund’s Pakistan allocations
Among the VARPs, Pakistan, population 189 million, is attracting investment due to attractive valuations based on fundamentals.
Dominic Bokor-Ingram at Charlemagne Capital, said Pakistan accounted for 18 percent of his Magna New Frontiers Fund, up from just 6 percent at the start of 2016 and nearly twice the benchmark weighting.
“It increased recently both due to the market becoming investable and because of the strong performance of the stocks we own,” Bokor-Ingram said. “We have a single country limit of 20 percent so we will not be able to go much higher.”
The KSE-100 Index, which includes the largest company in each of Pakistan’s 34 sectors, plus the next 66 largest companies, regardless of their sector, returned more than 45.1 percent in 2016. Companies are valued at nine times price-to-earnings and offer a market dividend yield of 5 percent.
Cement companies made particularly compelling investments for stock pickers like Bokor-Ingram. These companies have been able to maintain their margins while adding capacity needed to satisfy the demand for cement generated by an economy that was growing at around 5 percent per year but where the key ingredient limestone was difficult to come by.
Have you seen CPEC & OBOR stories on this blog?
Pakistan’s MSCI Index inclusion?
Before the reformist prime minister Nawaz Sharif took office in 2013, Bokor-Ingram’s frontier market fund had, like so many others in the sector, no investments in Pakistan at all.
Pakistan had been shunned for nearly a decade after the investment situation deteriorated in the mid-2000s, prompting investors to sell out and index provider MSCI to drop it from its widely followed MSCI Emerging Market Index in 2008. It was later included in the MSCI Frontier Markets Index, where it now accounts for 9.6 percent.
However, by 2015 its equity market had grown significantly and liquidity had improved. MSCI announced that it would review Pakistan in 2017 and include it in the MSCI Emerging Markets Index. Inclusion would attract more investors that use the index as a benchmark for their allocation to emerging markets.
Rami Sidani, head of frontier investments at Schroders, said Pakistan has a young, underinvested economy that was growing from a low base. More importantly, the government had started with much-needed structural reforms.
The Schroder Frontier Markets Fund has 14.8 percent of its portfolio invested in Pakistan, up from 10 percent in 2013. Sidani said his investments in Pakistan, most of which were in banks and companies producing cement, fertilizer or food, had returned close to 50 percent in 2016 alone.
“The [MSCI] upgrade would just be a bonus, on top of what is already a fundamentally solid case for investing in Pakistan,” Sidani said. “But we need the government to push ahead with the reforms.”
Understanding Pakistan Series
Pakistan’s strong fundamentals and risk
Pakistan has also caught the attention of Love at GAM, who has invested 2 percent of his JB Emerging Market Equity Fund in the country over the past two years in several cement, electronics and consumer goods companies.
Much of the focus has been on Pakistan’s economic growth story, but Love said there were other factors that had been underestimated by many investors such as the $57 billion infrastructure investment pledged by China that would boost the economy.
“The relationship of investing on thematics is always dangerous,” said Love, adding that many Pakistani companies had fundamentals strong enough to justify an allocation regardless of the macroeconomic outlook.
Choice is also still limited in Pakistan – at least when compared to larger emerging markets. Investments have so far been concentrated in a handful of companies such as Fauji Cement, Lucky Cement or PEL.
It also remains one of the riskier investments. Love said if the investment case for Pakistan played out, his investments could double their value over three years. If it does not, they could lose 30 percent.
Frontier markets were up about 6 percent in 2016, and within them, Pakistan had strong growth (image below):
Pakistan accounts for 18 percent of the Magna New Frontiers Fund, up from just 6 percent at the start of 2016 and nearly twice the benchmark weighting.