Which country would you guess is the sixth largest country in the world based on population size?
Is your mind going to one of the European countries? The answer is Pakistan with 197 million citizens. Pakistan is officially named the Islamic Republic of Pakistan, and is located in South Asia on crossroads of Central Asia and Western Asia. Unfortunately, this highly populated country only makes the news in the United States regarding terrorism. There is another side to Pakistan.
Similar to the post where we discussed the continent of Africa (UNTOLD STORY OF AFRICA), the middle class in Pakistan has been growing rapidly which will help as the government continues to hang on to its fragile democracy.
There continues to be a large percentage of the 200 million citizens living in poverty, but recent research discovered that approximately 30% of the total is now considered to be in the middle class and an additional 4% the upper class. This translates into over 84 million people living in middle or upper classes which is approximate size of the entire populations of the European powerhouse -Germany.
We often take many of our modern conveniences for granted, but moving into the middle class allows these Pakistani households to have such luxuries as a color television, a refrigerator, a washing machine and at least one household member who has completed school up to the age of 16. One important local indicator of success is the proportion of households that own a motorcycle the common transportation for Pakistanis. Motorcycle ownership soared to 34% in 2014 from just 4% in 1991.
As we indicated many times before this incredible improvement has been noticed by large international companies who can sell their products to this new middle class. For example, Nestlé, the Swiss transnational food and drink company, reported that their sales in Pakistan have doubled in the past five years to $1 billion.
Another indication of the continuing improvement of their lives of the Pakistanis, are the number of companies that are purchasing local Pakistan companies. They range from a Dutch dairy company – Royal FrieslandCampania NV -which purchased a local milk producer called Engro foods. In addition, French carmaker Renault SA is exploring setting up a plant to build cars there.
Pakistan has often been overshadowed by their giant neighbors India and China. However, the continued economic success has allowed a severe decrease in the number of people living in poverty. According to the World Bank, Pakistan has been able to reduce the poverty rate in half – to 29.5% – from 2002 to 2014 the last year of records.
So while we consider the Pakistani stock market still to be too unstable for investing our clients money, owning a globally diversified portfolio still allows investors to benefit from the good news coming from Pakistan and other emerging countries of the world. Pakistan is considered a “frontier country”.
What are the frontier countries? Using a benchmark provider as a proxy, the number of potential investable frontier countries varies, and country classifications differ. For example, Pakistan and Argentina are represented in the MSCI Frontier Index (30 countries), along with other countries such as Kuwait and Vietnam.
Frontier markets have received a great deal of attention in the past few years. Proponents of frontier investing compare these countries to the emerging markets of ten or fifteen years ago. That idea, with its implications of high potential returns and diversification benefits, is appealing. But these markets also present challenges—chief among them are their small size, low liquidity, and weak or immature market regulation. Other concerns include foreign ownership restrictions, political risk, and issues with business climate and corruption.
So for now, our investors gain exposure to these markets through the ownership of large international companies doing business in these countries such as Nestle’. Maybe in the next decade these countries will grow and be added to the emerging markets category which will allow investing directly in these Pakistani countries..
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