'The KSE-100 index should be around 60,000 points by the end of 2018,' says co-founder of Tundra Fonder

BR Research recently sat down with Mattias Martinsson, who is the Chief Investment Officer and co-founder of Tundra Fonder - a Swedish Mutual Fund that invests in frontier markets, including Pakistan. Tundra manages about $130 million in its Pakistan fund. Mattias has previously worked at HQ Emerging Markets and Varing Capital. In 2011, he along with his partners started the Tundra Fund. Below is an edited transcript of the interview.

<B>BR Research: When did you start looking at the Pakistan equity market and what made you invest in it?</B>

<B>Mattias Martinson:</B> I came across the Pakistan equity market in 2005 while searching for new ideas to pitch to my institutional clients at my previous company. Back then, I also had a very wrong perception about Pakistan and the same prejudice which many investors have to this date. Mostly because of what is portrayed by the media.

However, for some reason I started looking at the valuations and liked them. There was decent turnover in some of the top stocks and as I dug in deeper, I found out that the volume in the Pakistan market was one-third of Singapore, which was unbelievable. The companies in Pakistan were following international accounting standards and the fact that I could get data on them for 10-20 years and rely on it was something I did not expect, especially from my experience with the Russian market, where we had no actual numbers and had to fill in the gaps ourselves.

It was not until the end of 2008 that I first travelled to Pakistan and met with around 30 companies. Some of these companies were family-owned and had been around for 40-50 years. Their businesses were growing at an average of ten percent and the political or security situation was not having much negative impact on their performance. As I headed back to Sweden and went over everything that I had found out, I realized that this could be an once-in-a-lifetime opportunity for me. I kind of fell in love with the Pakistan market and decided to make it my life-work.

<B>BRR: When did you start your fund and were there any hurdles initially?</B>

<B>MM:</B> Once I had decided to invest in Pakistan, I was looking for the easiest way to do so, which would be through an ETF (Exchange Traded Fund). While India had many ETFs dedicated to its equity market, Pakistan had none. The solution for this problem was to start my own fund dedicated towards Pakistan.

Eventually, after convincing my partners, we started the Pakistan fund with $1 million in October 2011. Our start was not that good as the stock market went down sharply because of a Nato helicopter attack on Salala check post, after which Pakistan also closed down the trade route to Afghanistan. The market bottomed out at the end of December 2011 and since then it has been on ascending.

<B>BRR: How do you convince investors to invest in the Pakistan fund?</B>

<B>MM:</B> Convincing investors is not easy because they come with this set perception of camels on the road, terrorism, and chaos. They expect us to tell them that Pakistan has somehow turned a corner and the companies here would start making profits. We tell them that it is not like that and show them the data from the last 30 years, wherein if they had invested 10 years ago, they would have made fantastic returns. If they had invested 20 years ago then they would have made even better returns. The Pakistani market has always been good. It is not a recent phenomenon.

We do not force our opinion down their throats. We provide them with data and being sophisticated investors they then come back to us with some of the insights. For example, most Swedish investors are surprised to find that volatility in Sweden and Pakistan is almost the same. We try to be smart about how we present the data and try to navigate our investors towards the right direction.
We then show comparisons between Pakistan market with that of other frontier markets and on most of the metrics Pakistan comes out on top. The breadth and depth of the market here is far greater than its peers.

<B>BRR: How is Pakistan's market compared to some of the regional and global peers like India and Nigeria in terms of valuation and risk?</B>

<B>MM:</B> There was an article in Barron's a few years ago where this Pakistani writer used the expression 'perception arbitrage' and I think it is the same case today. If we look at the overall picture, then I would not say that Pakistan is riskier than India or Bangladesh. India has its own problems with respect to its size and diversity; they have these internal tensions too between various states, and the sheer size of India makes it much harder to manage.

However, both India and Pakistan are good stories with a young population, but one is trading at almost 20 times earnings multiple and the other (Pakistan) at below 10 times earnings multiple. So, valuation-wise we would go for Pakistan because it is trading at a steep discount.
Moreover, the financial infrastructure in Pakistan is far better than countries like Sri Lanka, Bangladesh, Nigeria, and Vietnam. In Nigeria, we could only find a couple of banks to invest in. There are barely any listed manufacturing and consumer companies there and those which are listed have very little turnover and are trading at very expensive valuations.

For Pakistan, I always ask my investors to imagine the potential they see in Africa and then add financial infrastructure to it.