In March, the Fund fell 5.9% (SEK) as compared to the benchmark MSCI Pakistan Net (SEK)’s return of -1.9%. The month was marked by aftereffects of macro-economic stabilization efforts by the government – 34% depreciation and a 500-bps monetary hike – yielding into an economic slowdown.
The main under-performing exposures were Materials and Utilities whereas the out-performing exposures accrued from Healthcare and the Energy sectors. During the month, we reduced our exposures in Healthcare (owing to out-performance), Material (low liquidity Cement company, marginally clipping Fertilizer Conglomerate and liquid Cement top-bet), Healthcare (owing to out-performance), Information Technology (owing to out-performance) and increased our exposure in Materials (long-steel manufacturing company based in the South).
In the outgoing month, the Market was exposed to massive deterioration in the FX reserves, Oil prices sticky upwards, and the economic aftereffects of the “macroeconomic” stabilizing efforts. With a cumulative 500 bps rate hike along with 34% currency depreciation in less than six quarters, the intent was obvious; realign the currency closer to the Real Effective Exchange Rate and bring the discount rate back to normal double-digit levels (Policy Rate at 10.75%). With or without the IMF, this was needed in essence to curtail the outflows of dollars or in economic jargon, Current Account Deficit (CAD), that has come down from a monthly USD 2bn to February 2019’s USD 356m by making imports dear through depreciation and duties.
Further on, such a quick adjustment was bound to slow the economic growth as the government face revenue shortfall amidst slow growth (FY19 GDP growth expected 3.5-4%) and higher Fiscal Deficit (because of higher domestic borrowing cost post DR hikes). As a result, the government is inhibited from offering a Fiscal Stimulus and the consumers are left with a major dent in their purchasing power for 2-3 years. However, the result could have been more painful if the government had not used its geopolitical network of friends and plugged in USD 13bn from China, Saudi, and UAE in the form of loans and oil credit facility. As the government prepares to enter the IMF program by the end of May, according to the Finance Minister, Asad Umar, the economy would finally be able to access pockets of the Asian Development Bank, World Bank, and other donors for growth projects. The Economy is set to break even – GDP 4% – and bottomed out declines in Fiscal Year 2020.
However, amidst the expected sanguine macroeconomic climate, there are strings of developments moving in the right direction. The government has prioritized water storage and disbursed amounts for Dams construction. Similarly, international coal prices have touched USD 70 per ton as we speak, which surely bodes well for the portfolio, due to the fact that we have increased the over-weight stance in Materials as the asset-values are trading at very attractive levels (despite low margin period of a year or so). As things normalize – 4-6 quarters from now – these equity values would probably out-perform the Index at a much faster pace than the defensive low beta portfolios.
While the near-term headwinds in form of IMF discussions, FATF meetings, budget preparations, YoY declines in sales, and a less probable downgrade from MSCI Emerging Market status that are going to keep the investors liquidity’ dried up, we see attractive entry points. The remittances have grown at 12% in 8MFY19 at USD 12bn and FDI indications in the form of USD 1bn from China´s Challenge Apparel, USD 150m from Total PARCO, and USD 118m in tourism to reaffirm foreigners’ interest. Also, the launch of a low-cost housing scheme and the court settlement of Real Estate mogul of flagship Bahria Town Karachi to kick in demand for Materials in the medium term.
More importantly, from where we see it, the double-digit local interest rates have reduced the institutional interest from Banks and Insurance companies – as they can invest in long term government bonds at 13.5% – has brought the asset values back to attractive levels – 2019 Price to Earning (P/E) multiple at 7.8x – for accumulation for next leg of economic growth.
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