The Fund rose 9.5%, compared to MSCI Pakistan IMI Net TR (SEK), which increased 6.4% during the month. The market welcomed the declining COVID-19 cases and visibility on the government’s economic roadmap as business activities resumed. Local investors celebrated the construction package presented by the government and heavily bought Materials and construction-related stocks. The Fund’s stock selection in Materials, mainly cement and construction steel, was the largest contributor of alpha during the month. Bouncing back from the severity of lockdown and lower economic activities in the last three months, our off-benchmark bets in Textiles and Automobiles had a decent run in July and contributed to the relative performance. Besides, our bets in Financials, Meezan Bank, and Adamjee Insurance also performed well for the Fund. The Fund maintained underweight in Energy stocks which had a good run-up in July as global oil prices increased hence contributed towards the negative relative returns. The Fund’s healthcare portfolio performed worse than the benchmark’s, but has performed very well since COVID-19 broke out and took a breather during the month. The Fund added exposure in the largest textile company in Pakistan, as international trade resumed, and selectively increased exposure in Financial and Energy names. The Fund reduced exposure in Materials and Utilities.
MSCI Pakistan IMI Net TR (SEK) rose by 6.4% during the month, MSCI FMxGCC Net TR (SEK) decreased 5.9% and MSCI EM Net TR (SEK) increased 2.4% in the corresponding period. The increased participation by local investors drove the market back to pre-COVID-19 levels. Significant reduction in new corona cases, government’s introduction of construction package in efforts to spur the economic growth through construction activities, strong remittances, stable FX reserves, and improved balance of payments indicate better than expected economic performance. The average daily traded value touched a 30months high to USD 88m. Foreigners, however, remained net sellers in the market to the tune of USD 68m during the month.
Since the implementation of the smart lockdown and resumption of business activities, trade numbers have shown signs of recovery. During July, exports increased by 5.8% Y/Y while imports declined by 4.2% Y/Y, translating into the trade deficit declining by 14.7%. Further, the monthly remittances figure reached an all-time high of USD 2.46bn in June that can be partly explained by seasonal inflows ahead of the Eid festive. Resultantly, the current account registered a modest deficit of USD 96m in Jun’20 as compared to USD 981m deficit in the same month last year. For the Fy20, the current account recorded a massive decline in deficit by 78% Y/Y to USD 2.96 bn or 1.1% of GDP. Construction activities have picked up significantly as represented by cement sales increasing by 37% Y/Y in July.
Pakistan signed two loan agreements with multilateral institutions amounting to USD 750m, where USD 505m was received during the month. In addition to this, the country is making swift progress in negotiating debt relief with G20 countries. These negotiations with over a dozen of bilateral creditors are expected to provide around USD 2bn debt relief to Pakistan.
In an important development, Pakistan’s legislative assembly passed a money-laundering bill to fulfill one of the FATF’s key demands. The government is expected to submit a compliance report on the implementation of actions taken by the country by August 6th. The feedback on the compliance report would then become the basis for the FATF plenary review meeting, which is expected to take place in October 2020.
Pakistan saw a significant reversal in COVID-19 cases in the last month. The latest data indicates that the daily infection cases are down to 330 from its peak of 6,825. Similarly, the active cases are down to ~20k from its peak of 108k on July 1st. If this trend continues, the government has indicated to further relax restrictions on business activities to bring the economy back to full output.
August is a result season, where most of the companies would be either releasing full-year or half-year financial results, and this is likely to dictate market movement. So far only a handful of banks and chemical companies have released their earnings report and surprised the market expectations with high double-digit growth. However, we are expecting a mixed bag of results where energy and cyclical companies are likely to take a hit of lower oil prices and restricted economic activities. Most of the adverse impact of COVID-19 on earnings during the June quarter is largely incorporated in the stock prices.
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