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Pakistan Likely To Enter MSCI Emerging Markets Index

MSCI is considering reclassifying the Pakistani equity market from frontier to emerging market status on June 14th, 2016. MSCI – a leading provider of research-based indexes and analytics – announced that it will release on June 14, 2016, shortly after 11:00 p.m. Central European Summer Time (CEST), the results of the 2016 Annual Market Classification Review. As a reminder, three MSCI Country Indexes are currently included on the review list of the 2016 Annual Market Classification Review: MSCI China A and MSCI Pakistan Indexes for a potential reclassification to Emerging Markets and MSCI Peru Index for a potential reclassification to Frontier Markets. It is important to note that MSCI is not the only index provider that classifies markets but is considered the reference benchmark for many markets. MSCI and other index providers base their market classification on a number of quantitative measurable and comparative criteria while aiming to avoid qualitative and/or subjective criteria. PAKISTAN: ECONOMY IN FOCUS Pakistan is a country with a population of 190 million people. Pakistan’s GDP stands at USD 250 billion (Year 2015). Pakistan’s economy continued to pick up in the fiscal year 2015 as economic reform progressed and security improved. Inflation markedly declined, and the current deficit narrowed with favorable prices for oil and other commodities. Despite global headwinds, the outlook is for continued moderate growth as structural and macroeconomic reforms deepen. Selected economic indicators (%) – Pakistan 2015 2016 Forecast 2017 Forecast GDP Growth 4.2 4.5 4.8 Inflation 4.5 3.2 4.5 Current Account Balance (share of GDP) -1.0 -1.0 -1.2 Source : Asian Development Bank CPEC : THE GAME CHANGER FOR PAKISTAN China Pakistan Economic Corridor (CPEC) is a mega project of USD 46+ billion, taking the bilateral relationship between Pakistan and China to new heights. The project is the beginning of a journey of prosperity for Pakistan and China’s Xinjiang. The economic corridor is about 3,000 kilometers long consisting of highways, railways and pipelines that will connect China’s Xinjiang province to the rest of the world through Pakistan’s Gwador port. The investment on the corridor will transform Pakistan into a regional economic hub. The corridor will be a confidence booster for investors and attract investment not only from China but other parts of the world as well. Other than transportation infrastructure, the economic corridor will provide Pakistan with the telecommunications and energy infrastructure. MSCI INDICES AND PAKISTAN – A QUICK RECAP It is important to mention that between 1994-2008, Pakistan was part of the MSCI Emerging Markets Index. After the Balance of Payment crisis in 2008, KSE was shut down for 4 months after which the country was kicked out of the Emerging Markets Index. In May 2009, Pakistan was added back in the MSCI Index, but this time it was added in the Frontier Markets Index. In June last year, MSCI put Pakistan up for official review regarding inclusion into the Emerging Markets Index. Now, as per today’s press release, MSCI will make its decision whether to upgrade or not on 14th of June. RECAP: THE MSCI PAKISTAN INDEX Click to enlarge Click to enlarge Click to enlarge Click Here for MSCI Fact Sheet INDEX METHODOLOGY The index is based on the MSCI Global Investable Indexes (GIMI) Methodology – a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly – in February, May, August and November – with the objective of reflecting change in the underlying equity markets in a timely manner while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large and mid capitalization cutoff points are recalculated. SOME IMPORTANT NUMBERS/STATS Click to enlarge WHAT TO LOOK FOR IF PAKISTAN ENTERS MSCI EMERGING MARKETS INDEX? If the decision is positive, emerging markets funds with 40-50 times the capital of frontier funds will be forced to have a look at Pakistan. In our view, this is an opportunity with a risk-reward skewed heavily towards the positive side. PSX – Pakistan Stock Exchange – currently trades at 9.0x earnings; companies have grown faster than their regional peers in USD over the last ten years. Should Pakistan enter MSCI Emerging Markets, it does so at more than 40% P/E discounts to its Asian EM peers. We don’t believe this is sustainable, hence calls for a positive re-rating of the valuations. ETFs IN FOCUS: Several ETFs and mutual funds invest in emerging markets; on the other hand, a small number of ETFs focus on frontier markets. For comparison purpose, we are taking BlackRock Capital ETFs. BlackRock Capital offers the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ), asset base of which is approx USD 25 billion when compared to BlackRock Capital’s iShares MSCI Frontier 100 Index ETF (NYSEARCA: FM ), asset base of which is merely USD 420 million. It is important to note that the fund size of most of the frontier markets ETFs are very small when compared with emerging markets ETFs. Hence, we don’t see any major selling pressure from the liquidation of frontier market funds which are invested in Pakistan, as that selling will be absorbed easily by the emerging market funds. In fact, emerging markets funds will bring in more liquidity in the market, hence, providing frontier market funds an easy exit. OUR STANCE We are of the view that it is likely that Pakistan will be given a green signal for entering MSCI Emerging Markets on June 14th, 2016. We caution against the notion that reclassification is a panacea for market ills or underperformance. Typically, reclassification (both upgrades and downgrades) have followed or been accompanied by economic and financial policy reforms, including improvements in market infrastructure. It is these more fundamental and structural reforms that attract and retain international investors and boost the confidence of domestic investors. Reclassifications are best viewed as signaling a confirmation of policy reforms and changes in market conditions. Hence, an identification problem may arise whereby improved market conditions are attributed to market reclassification decisions, whereas they are due to policy actions and reforms which lead to a reclassification. Similarly, we note that reclassification may have perverse effects if there is an ‘overshooting’ effect whereby speculation leads to higher prices in advance of a reclassification, over and above what would be justified by market/ economic fundamentals. Prices then adjust on the actual reclassification event. As highlighted in the article, Average Annual Revenue and Net Profit Growth of companies listed in Pakistan have been phenomenal between 2005-2015. Moving forward with CPEC in place, Pakistan’s inclusion in the MSCI Emerging Markets Index will be beneficial for both local as well as global investors. 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. I have no business relationship with any company whose stock is mentioned in this article.

ETF Deathwatch For December 2015: AccuShares Join The List

The quantity of ETFs and ETNs on Deathwatch jumped by 23 for December. There were 28 additions and only five removals. Of those coming off, three were the result of improved health, while the other two were closed, delisted, and liquidated. The net increase pushes the membership count to a 35-month high of 366, consisting of 266 ETFs and 100 ETNs. Heading up the new arrivals are the two AccuShares ETFs, which are now more than six months old, making them eligible for Deathwatch. These two ETFs attempt to track the spot price of the VIX Volatility Index and fail miserably at doing so. They are teeter-totter ETFs, constructed much like the ill-fated MacroShares. As such, they were doomed from the start. But AccuShares added new twists that made them even worse than MacroShares in my opinion. AccuShares introduced the concept of “Corrective Distributions” that try to keep the demand for “up” shares in balance with the “down” shares. However, these distributions were both numerous and large, quickly depleting their asset bases. To overcome this, the funds made distributions of offsetting shares two months in a row: The owners of AccuShares Spot CBOE VIX Up (NASDAQ: VXUP ) received a “Corrective Distribution” of one share of AccuShares Spot CBOE VIX Down (NASDAQ: VXDN ), and owners of VXDN received a share of VXUP. It is almost impossible to bet on the direction of the VIX when offsetting positions are forced into your account. So far, the VXUP has made per-share distributions of $44.67 plus two shares of VXDN . Owners of VXDN have received $15.12 and two shares of VXUP (it’s a vicious circle). Between all the distributions, reverse splits, and offsetting shares, performance is nearly impossible to determine, and they do not even attempt to do so on the website. These products need to close before anyone else gets hurt. Once again, the majority of the new names added to ETF Deathwatch this month carry the smart-beta label. This suggests the market is currently saturated with smart-beta products, and investors need time to understand and digest all that are currently available. Three of the new additions are China-oriented funds, indicating this is another group approaching saturation. From a quantity standpoint, Global X had the most products added this month with eight of its ETFs, including all four of its new “scientific beta” line, joining the list. The average asset level of products on ETF Deathwatch increased from $6.8 million to $6.9 million, and the quantity of products with less than $2 million held steady at 73. The average age increased from 48.0 to 48.2 months, and the number of products more than five years old surged from 114 to 130. Here is the Complete List of 366 Products on ETF Deathwatch for December 2015 compiled using the objective ETF Deathwatch Criteria . The 28 ETPs added to ETF Deathwatch for December: AccuShares Spot CBOE VIX Down Shares AccuShares Spot CBOE VIX Up Shares AdvisorShares Madrona Global Bond (NYSEARCA: FWDB ) Columbia Large Cap Growth (NYSEARCA: RPX ) DB Crude Oil Long ETN (NYSEARCA: OLO ) Deutsche X-trackers MSCI All China (NYSEARCA: CN ) EGShares India Small Cap (NYSEARCA: SCIN ) ELEMENTS Morningstar Wide Moat Focus ETN (NYSEARCA: WMW ) Elkhorn S&P 500 Capital Expenditures (NASDAQ: CAPX ) ETRACS S&P 500 Gold Hedged Index ETN (NYSEARCA: SPGH ) Global X JPMorgan Efficiente (NYSEARCA: EFFE ) Global X MSCI Pakistan ETF (NYSEARCA: PAK ) Global X NASDAQ China Technology (NASDAQ: QQQC ) Global X Scientific Beta Asia ex-Japan ETF (NYSEARCA: SCIX ) Global X Scientific Beta Europe ETF (NYSEARCA: SCID ) Global X Scientific Beta Japan ETF (NYSEARCA: SCIJ ) Global X Scientific Beta US ETF (NYSEARCA: SCIU ) Global X YieldCo Index ETF (NASDAQ: YLCO ) Guggenheim International Multi-Asset Income (NYSEARCA: HGI ) iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) iShares B – Ca Rated Corporate Bond (BATS: QLTC ) iShares FactorSelect MSCI USA (NYSEARCA: LRGF ) iShares Treasury Floating Rate Bond ETF (NYSEARCA: TFLO ) Market Vectors Gulf States (NYSEARCA: MES ) PowerShares China A-Share (NYSEARCA: CHNA ) PowerShares KBW Insurance (NYSEARCA: KBWI ) WisdomTree China ex-State-Owned Enterprises (NASDAQ: CXSE ) WisdomTree Japan Quality Dividend Growth (NYSEARCA: JDG ) The 3 ETPs removed from ETF Deathwatch due to improved health: Credit Suisse Long/Short Liquid Index (Net) ETN (NYSEARCA: CSLS ) First Trust Morningstar Managed Futures Strategy (NYSEARCA: FMF ) ProShares Managed Futures Strategy (NYSEARCA: FUTS ) The 2 ETPs removed from ETF Deathwatch due to delisting: EGShares Blue Chip ETF (NYSEARCA: BCHP ) EGShares Brazil Infrastructure (NYSEARCA: BRXX ) ETF Deathwatch Archives Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Asia’s Response To The Federal Reserve: Finding Value In Frontier And Emerging Markets

Summary The increasingly strong USD and China’s currency devaluation in August have resulted in substantial FX losses for a large number of countries in Asia. However, the extremely high level of growth and future potential in Asia can offset this risk in certain cases. As the Fed may increase interest rates soon, investment in Asia should be a strategic approach of investing in countries with high growth and a strong performing currency. This article presents Vietnam, Pakistan, India, and the Philippines as superior options for investors. As my research primarily focuses on international companies, examining the inherent FX risk is one of the most crucial aspects for considering investment. FX risks are justifiable if there is a strong growth trend in the given country, and most importantly if valuation is low. China’s devaluation in August created a global FX nightmare, and put pressure on the FED to consider the global implications of hiking interest rates. Each country’s response to this devaluation provides a clear example of the varying strengths of each currency, and this factor, coupled with the country’s macroeconomic potential, provides enough for investors to discern how to find good value in global equity. A flurry of conservative value based opportunities has emerged in global equity in Asia, for investors who are willing to take a long term horizon. Despite the Fed receiving global pressure not to hike interest rates, it appears that the Fed will not be deterred from hiking interest rates . Therefore, FX risk is one of the most relevant factors to consider at the moment, as markets in Asia may become gloomy soon. Despite this threat, good value can certainly be found in Asia at the moment, and a sell off would create a flurry of value based investment opportunities. Finding Growth While Avoiding FX Risks The performance of countries’ currencies this year, especially in response to China’s devaluation this August, provides an excellent means for investors to assess where good value can be found in Asia. Countries that have already displayed slowed economic growth, and have had substantial FX losses, should certainly be avoided. Malaysia presents the largest area of concern, due to the poor performance of the country’s currency and the increasing political risk . The iShares MSCI Malaysia ETF (NYSEARCA: EWM ) has had a YTD decline of 22.67% Slowed growth in Thailand, and the poor performance of its currency and stock market, also make Thailand a destination that can be considered less superior. The iShares MSCI Thailand ETF (NYSEARCA: THD ) has had a YTD decline of 14.14% . Based on an investigation of growth combined with exchange rate movements, I am most bullish about the upside potential of Vietnam, India, Pakistan, and the Philippines due to the combination of high economic growth and the acceptable performance of the country’s currencies. The high level of growth in these countries can be considered strong enough to offset the FX risk. In addition to high GDP growth, the trends of increased consumption in all of these countries can also be considered positive drivers: Vietnam Vietnam’s appeal for investment lies in a wide variety of factors, including its stock market’s high discount compared to other countries in Asia, high consumption and retail sales growth, high GDP growth, its high youth population, and high dividend yields for listed equity. Its P/E is approximately 12, yet a flurry of value based opportunities with single digit P/Es can be found in the country’s stock market. Vietnam’s economic growth is already substantial, yet its inclusion in the TPP can serve as an economic catalyst for the company’s GDP growth to reach 11% by 2025 . Vietnam’s low wages have caused it to have a new competitive advantage over China, resulting in a shift of manufacturing to Vietnam and a substantial increase in the country’s exports . Based on the existing trends of growth, coupled with the inevitable future growth of Vietnam’s economy, the country can certainly be considered a superior destination for value investing, as its soon to be status as an emerging market and the removal of the FOL may both serve as catalysts for higher valuation in the stock market in the future. Investors can take advantage of Vietnam’s high discount and growth by investing in VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ) or Vietnam Holding Ltd. ( OTC:VNMHF ). Pakistan Pakistan’s stock market index gain of 13.86% necessitates a closer look at the value associated with investing in this country, as its stock market was one of the best performing stock markets in Asia. Most impressive is the fact that low valuation can still be found in a wide number of companies on the Karachi Stock Exchange, and the Global X MSCI Pakistan ETF’s (NYSEARCA: PAK ) P/E is currently only 8 . Terrorism in Pakistan has not been able to deter the rapid and consistent ascent of the country’s stock market , and it is further edifying to note that there has been a 70% decrease in terrorism over the past 9 months. High levels of growth can be found in strategic industries, such as the construction industry, and particularly in the cement industry, which experienced growth of nearly 57% in the past year . FDI into Pakistan has increased substantially in the past years, and China has recently signed agreements for $28 billion of investment in Pakistan, which will be part of $45 billion economic corridor. Although Pakistan is a very contrarian suggestion, its relatively superior performance in Asia certainly merits it as a relevant suggestion. The Philippines While the Philippines high growth and future potential cannot be denied, the relatively higher valuation of its stock market makes it a less superior choice, as compared to Vietnam and Pakistan. The P/E for the iShares MSCI Philippines ETF (NYSEARCA: EPHE ) is currently 18 . The fund primarily invests in the financial services, consumer products, and real estate industry, which is a strategic approach considering the high levels of growth in consumption and the real estate industry. The real estate industry is perhaps one of the most strategic areas for investment in the Philippines, as its growth is heavily being driven by business process outsourcing, increased retail centers, tourism, and the emergence of townships outside of Manila. The ETF’s performance has not been terrible, with a YTD loss of only 7.3% , and a large portion of the fund’s holdings have low liquidity or high valuation. Therefore, the best approach to investing in the Philippines is through this ETF, while I would respectfully suggest the relative superiority of Vietnam and Pakistan. India India is another excellent option for investors to consider, as its economic growth surpassed the growth of Vietnam, The Philippines, and Pakistan. The country’s currency has been gradually improving, and a 4.74% loss of its currency is not strong enough to offset the appeal of investing in India. The high GDP growth, consumer spending growth, and retail sales growth is being heavily driven by the country’s demographics, as it contains the world’s largest youth population . In previous articles, I have suggested the Market Vectors Small Cap ETF (NYSEARCA: SCIF ) and EGShares India Small Cap ETF (NYSEARCA: SCIN ) as superior investment vehicles, due to the ETF’s strong earnings growth and relatively lower valuation. The average P/E for both of these ETF’s is 11.5, which can certainly be considered a strategic approach to India’s economic growth. One strategic industry in India to consider is India’s biotechnology industry, which is projected to grow by 30% annually until 2025. Investors can access the growth of India’s biotechnology by investing in Dr. Reddy’s Laboratories (NYSE: RDY ). As one of the highest growing countries in Asia, with extremely favorable demographics, a value based approach to India certainly has its merits. India is a country that will be able to stand strong amidst market volatility in Asia. Conclusion The Fed’s decision to potentially hike interest rates in December does present a relevant short term threat to markets in Asia. While a sell-off would certainly be negative for markets in Asia, it could also be seen as force that would create a flurry of value based investment opportunities in Asia. There will certainly be dark areas in Asia in the near future, yet the markets of Vietnam, Pakistan, the Philippines, and India can certainly be considered bright spots in Asia. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.