THE FUND:

During the month, the fund went up by 1.2% as compared to the benchmark’s MSCI Pakistan Net (SEK) return of -0.8%. The fund continued its positive return in April, despite heightened political noise. Outperforming exposures in the current month were Financials, Consumer Staple and Healthcare, while Materials underperformed. State Bank of Pakistan’s (SBP) contemplation on assigning higher capital requirements for certain banks, known as Domestic Systemically Important Banks (D – SIBs), kept the stock prices of major banks in check. Our underweight stance in the sector contributed positively to the fund’s returns. Similarly, one of our consumer plays, Shezan International, reported strong earnings growth in 9MFY18 on the back of improving margins. Trading at a forward P/E multiple of less than 10x, the company is expected to contribute further to the portfolio’s outperformance. Our recently acquired stake in a pharmaceutical company, AGP Pharma, also posted strong results. The stock price is up more than 20% since the first listing in the beginning of March. The fund’s underperformance stemmed from the underweight in the fertilizer space. It was rumoured that the new budgetary announcements would include strong relief measures for the fertilizer industry but this did not come to pass.

In April we increased exposure in Hub Power Company (as a USD-hedged growth play), National Bank of Pakistan (improving lending record at bottom valuation), and Pioneer Cement and DG Khan Cement (on expectations of improving local sales and better industry pricing). Exposure was reduced by capitalising gains in Fauji Foods Ltd. and selling all our stake in Nishat Mills Limited (after the company announced a lower than expected stake in an auto venture with Hyundai).

MARKET:

Political debates and economic numbers dominated conversation in April 2018. As the reserves slipped to 10 weeks of import cover, questions were raised over their sustainability. The government answered by (i) a 24% increase in March exports year-on-year while slowing down import growth to 5% reducing the Current Account Deficit (CAD) to USD 1.1bn vs USD 1.28bn in February 2018; and (ii) introducing a generous Tax Amnesty scheme for Pakistani owned foreign and local assets, which is expected to rake in USD 1bn by June end. A 10% currency depreciation in less than five months also helped narrow the trade deficit. The results should be more visible after 2 quarters. Meanwhile, the government is resorting to commercial loans from China and relying on the Tax Amnesty scheme to cushion reserves until the next government is formed in August 2018.

Politically, the ruling party (PML-N) continued to suffer setbacks as ~4-5% of their members in the assemblies have switched loyalties primarily to Pakistan Tehreek Insaf (PTI) led by Imran Khan. Interestingly, a movement for a separate province in South Punjab has also begun that can act as a swing factor (previously representing PML-N in the elections) in the upcoming elections. In May, we anticipate greater clarity on the names of political representatives who might be switching political parties, and see the extent of defections from PML-N, the ruling party. Despite being disqualified for life, former Prime Minister Nawaz Sharif, continues to campaign, hoping to win the elections, and make constitutional changes enabling his return to political life. Geo-politically, Pakistan has been regaining lost ground as key Army personnel visited Russia and Uzbekistan to meet with envoys from India, United States and Japan to rebuild regional prominence. Locally, cement sales increased by 12% year-on-year. Cement prices also increased by 8-10% in the northern areas of Pakistan, where most of the cement is sold. The government recently approved a National Water Policy that involves allocating more funds to the development of dams through internal financing. In turn, the Economic Coordination Committee (ECC) approved Mohmand Dam (800MW) worth USD 2.6Bn. The construction of dams should increase cement utilisation and contribute to higher returns. Our holding, Lucky Cement announced a USD 150m expansion of 2.6m tonnes in the north; a USD 109m expansion in Iraq should also add value to the company’s worth. Another top bet – Hum Network – launched an online grocery website (hummart) to capitalise on the growing retail demand in urban areas.

The government announced the ‘last’ budget of its term. It stands as a reflection of PML-N’s election manifesto. They announced (i) a reduction in Corporate Tax from 30% to 25% in five years, (ii) the removal of tax on Bonus Shares, (iii) a yearly reduction in Super Tax (1%), (iv) a hefty reduction in the Income Tax Rate, and (v) a reduction of mandatory dividend payouts and the penalty of such non-compliances. In a gambit to expand the tax net, the government also announced that non-tax filers could not purchase real estate valued at more than ~USD 35,000. Overall, we think these measures are materially positive for the stock market and the economy as a whole. They can go a long way in documenting the black economy (assumed) value USD 150 – 200bn and address the low tax-to-GDP ratio. However, these measures may very well be undone if the incoming government adopts a different approach than PML-N. At this time, we know what to expect if PML-N comes to power again.

DISCLAIMER:
Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.