Dust Up

If you haven't heard, the headline in the picture sums it up.

Pakistani President Musharraf has called a state of emergency and has imposed military rule which could delay elections by a year, according to one report I read. At the same time Benazir Bhutto is calling shenanigans (a term I am borrowing from Barry who I believe took it from Stan Marsh on South Park) and vows that her party will act.

It certainly sounds messy, regardless of what the real impact turns out to be. And it might not be so bad given that the KSE 100 only fell 4.5%.

Pakistan gets a lot of attention, including from me, as an investment destination of the future. It is one of these 100 million people-plus countries with great growth numbers and a young population that will ascend to a better standard of living (still may not compare to any developed markets but still).

I pretty much say the same thing about all of these places. I try to learn some of the numbers, a little about what makes the economy tick, a little about the stock market and a couple of companies and then monitor it. All this lays groundwork for the future. I think following a country like this for a few years before an eventual investment will likely mean fewer surprises.

A new frontier index from S&P, that everyone (including me) thinks will become an investible product at some point, allocates 28% to Pakistan mostly in banks. Fast forwarding a little bit to when this is a fund (remember it is not now nor has anyone even filed), I can envision people owning too much of this, then similar news comes along to derail, even if just temporarily, one of these countries. Maybe the next one won't start in Pakistan, maybe it will be a gas issue in the Ukraine, something military/political in the middle middle east (UAE and Jordan combine to make up 36% of the S&P index) or something else somewhere else.

When these markets are hot, doubling in one year is not a tall order. Allocating 1-2% will be sufficient if the time ever comes. Getting a double out of a 2% weight, then add in a couple more percentage points in overall dividend yield means the rest of the portfolio does not have to do much else to keep up with the market in most years.

It should be obvious that frontier and emerging markets can also crater at any given time.