Investing in Pakistan can be tricky for U.S. investors. The country is considered to be a frontier market by index providers, which implies higher degrees of volatility and risk than emerging markets. Additionally, due to the size of its equity and bond markets compared to other foreign markets, Pakistan has a limited amount of options for foreign investors.
The Karachi Stock Exchange (KSE) is the major bourse in Pakistan and is home to over 600 companies. Investors looking to access the KSE and its member companies should do so through a local broker. Even when foreign investors establish that contact, other issues remain. For example, foreign investors in Pakistani stocks are limited to ownership of financial services shares and those investors cannot acquire majority control of Pakistani firms.
Bonds may be a more practical alternative when it comes to investing in Pakistan, particularly because the government there has taken steps to attract more bond investors. Those steps include added transparency and increased ease of opening brokerage accounts. However, Pakistan is home to rampant inflation, which has lead some ratings agencies to assign junk ratings to the country’s government bonds. That means investors face higher credit risk.
There are a few mutual funds that offer slight exposure to Pakistan, but currently there are no exchange traded funds (ETFs) that track Pakistani stocks. As is the case with the country’s equity market, investors are best served by making contact with a local brokerage to gain access to a variety of Pakistani mutual funds that are only offered within the country.
A practical, safer way of getting exposure to Pakistan is through the shares of multi-national companies that do business there. Investors can find some familiar names operating in Pakistan in sectors such as energy, industrial and materials. The downside for investors is that many major developed market companies that do business in Pakistan are not heavily dependent on the country as a revenue driver, so even if the Pakistani economy is performing, it will not make a huge dent on the returns of foreign large-cap firms operating there.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.