SIAS Global Equity - A Case for Pakistan

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Global Equity: New Entrants in Emerging Markets

Presented byMahad Farrukh

Gursimran SinghSavva Cherdanstev

[email protected]

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MSCI Classifications: A Case for Frontier Markets

Portfolio Perspective

Investment Thesis

Macro Analysis

Risk Factors

Conclusion

Valuation

Source: iShares

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Reclassification of Qatar & UAE

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QATAR INDEX UAE INDEX

Inclusion in MSCI Emerging

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QATAR P/E UAE P/E

Inclusion in MSCI Emer-ging


Investment Thesis

Macro Analysis

Risk Factors

Conclusion

Valuation

Source: Bloomberg

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Macro Analysis

Investment Thesis

MSCI Market Classification Criteria


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)

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Macro Analysis

Investment Thesis

Companies meeting MSCI Emerging Criteria


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

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Investment Thesis

Macroeconomic Overview


Macro Analysis

Risk Factors

Conclusion

Valuation

Source: Bloomberg

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KSE 100 MSCI WORLD

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GDP Growth YoY( %)

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Inflation Benchmark Rate

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Investment Thesis

Inflation and Currency Performance against USD

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Depreciation against USD Inflation


Macro Analysis

Risk Factors

Conclusion

Valuation

Source: Bloomberg

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Macro Analysis

Investment Thesis

Underpricing against Regional Peers on Earnings


Risk Factors

Conclusion

Valuation

Source: Bloomberg

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• 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


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.

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Macro Analysis

Investment Thesis

Correlation Matrix of Pakistan against GE Holdings


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


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

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Macro Analysis

Investment Thesis

Appendix I: Institutional Framework in Emerging Countries


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)

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Macro Analysis

Investment Thesis

Appendix II: Foreign Ownership in Companies


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

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Macro Analysis

Investment Thesis

Appendix III: ETF Tracking


Risk Factors

Conclusion

Valuation

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KSE100 Index [LHS] PAK ETF [RHS]

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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

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Macro Analysis

Investment Thesis

Appendix IV: Governance Scores


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

Documents

SIAS Global Equity - A Case for Pakistan