Below are selected excerpts from BR Research's recent sit-down with the fund manager in Islamabad:
BR Research: First, briefly tell us about the origin of Tundra Fonder and the Pakistan Fund you launched back in 2011.
Jon Scheiber: Tundra Fonder is based out of Stockholm, Sweden. In the overall mutual fund industry back in Sweden, we are a specialised, boutique asset manager, with a limited size. When it comes to global frontier markets, I'd say we are in the upper half of the asset managers who specialise in frontier markets.
Here in Pakistan, we are invested in over thirty companies. These are all diversified investments, with a focus on ESG (environmental, social and governance) criteria. Typically, we play sectors and companies that can rely on some sort of structural, secular story and have a clear, long-term case. These would include sectors linked to consumerism, infrastructure, urbanization, and financial services.
We have seven people working in our Pakistan office, all of whom are locals. We have a combination of western and local components. The western portion provides investors with the safety net of strict compliance rules. And the local presence helps with the information deficiencies that we encounter in the local market.
BRR: What is the current size of Tundra's Pakistan Fund and how much share does this fund have in Tundra's overall investments?
JS: The total assets under management of Tundra Pakistan Fund are currently worth $72 million. This represents just south of 20 percent of Tundra's total assets. We do, however, also have Pakistani exposure in our global fund. This makes our total Pakistani exposure across our funds to approximately $100 million.
BRR: You are also invested in some other frontier markets. How do those markets compare to Pakistan?
JS: Besides Pakistan, we also focus on the stock markets of Bangladesh, Sri Lanka, Vietnam, Kenya and Nigeria. The Pakistan Stock Exchange, among this bunch of frontier markets, is one of the most liquid. And it also happens to be one of the cheapest. But the underlying themes are similar in all of these markets. These include consumerism, urbanization, and infrastructure.
We try to find companies at very reasonable price within those pockets. We also look for companies that have very strong brands in the local market. This is where our local presence becomes much more crucial as there is information deficiency, including in Pakistan.
BRR: You have visited Pakistan before. What's on your radar this time around?
JS: Tundra has been in Pakistan since 2011. We don't generally agree with the kind of news coverage Pakistan gets abroad. So this is another opportunity for us to visit Pakistan again and assess the situation here. This time, we also brought an investor delegation with us.
BRR: So what is your assessment from this trip so far?
JS: The security has improved substantially. We brought a delegation with us from Nordic countries and they were comfortable going around, without security guards. The delegates have been positively surprised by the potential of this frontier market and are also aware of what needs to be done.
BRR: Can you specify what needs to be done?
JS: In the short term, there is the political situation in the country. It's anybody's guess how it's going to pan out in the next six months. And then there is the currency, which we are inclined to say might see another devaluation. In the long term, it will be interesting to see whether the country can get some sort of reforms going in areas like agriculture, education including vocational training, and financial reforms including e-banking.
BRR: You mentioned the political risk and the currency risk. Being an asset manager with significant portfolio exposure in Pakistan, what is your view on this market for the next six months?
JS: We foresee a risk of volatility until July, when we will know what is going to happen with the elections. Probably post elections, we will get some clarity on the currency situation and whether there is going to be another IMF deal.
But there is still probably limited downside, given that it's a very cheap (stock) market. After what happened last year, it's a decently cheap market compared to its own history, and it's also cheap compared to most peers. As the structural case remains there, the key for long-term success would be continuity and stability.
BRR: Can you elaborate on what you mean by 'structural case'?
JS: There are a number of areas. One, the population is huge, which if educated and trained properly can help the economy grow. Two, energy is no more a major issue impacting industrial production. Three, transport infrastructure is getting better because of CPEC. This project may also help Pakistan lift its export sector. And four, the low penetration of new technology, including e-banking, means a lot of potential to digitise part of the society.
BRR: There are indications that Pakistan might be put back on the 'grey list' of the Financial Action Task Force (FATF) come June. Does that, in any way, impact your investments in Pakistan?
JS: Not really. Pakistan was on the list several years before and we were already here and we were not impacted. Our view is that the FATF decision is most likely a political thing.
BRR: Why do you think the FATF has become political?
JS: Look, there are several European banks that are under investigation and they have been fined heavier for negligence compared to Pakistani banks. But there is nobody telling that Germany should be on the list, for instance. Somehow it's okay to tell FATF that Pakistan should be on the list because Pakistan is nobody in the international community. But you cannot tell that to Germany.
BRR: Finally, what is your view on the trajectory of global interest rates, in light of the US Federal Reserve's recent rate hikes?
JS: The keyword is that the Fed is 'expected' to raise rates again this year. As long as there is no big deviation from the expectation, the markets will be fine. The inflation pressure globally is very low. We don't have indicators of inflation picking up. Also, historically, it doesn't really matter if rates go up a little bit. Rates have to reach a certain level where they eat out of the monetary growth in the system.
In short, there is an abundance of liquidity floating around the global economy. And it will take quite a few interest-rate hikes for that to be removed from the market. Europe is doing fine with growth; so is the US. But we don't have any real inflation. So, I am not too concerned about rates going up in the future. It'll be a different story if there would be a big shoot-up in the global inflation; but we don't see that yet.
BRR: But what about asset price inflation?
JS: That's a good point. But we are still not sure as to what extent the central banks globally care about that. Sometimes they indicate that they care about the asset bubble; sometimes they also signal that it's not at the top of their agenda. Also, while a lot of the developed equity markets may be expensive today, I wouldn't say that there is exuberance in those markets.