In December 2018, the Fund went down 9.1% in SEK as compared to the benchmark MSCI Pakistan Net (SEK)’s return of -13.8%. The Index remained bearish due to a lack of clarity regarding the Balance of Payment’s external funding deficit in the medium term.
During December, the Fund reduced its exposure in Gul Ahmed Textiles and MCB Bank due to stronger out-performance and channeled the funds into DG Khan Cement and Maple Leaf Cement. We believe that the asset valuations of such companies are incorporating and reflecting overly pessimistic scenarios which, over the medium term, will likely show significant out-performances.
The main under-performing exposures this month were DG Khan Cement, Hum Network, Kohinoor Textiles and General Tyres. The out-performers included EFU Life, AGP Limited, K-Electric and Abbot Pakistan.
December did not bring any respite nor was there much Christmas cheer for investors in Pakistan, or across the globe (ask Apple’s shareholders!). Playing in the midst of medium term uncertainty on external financing and emerging from an abrupt 150bps hike in the monetary policy, the equity asset class trimmed its valuation in response to higher cost-of-capital. Pakistan’s latest diplomatic forays into securing an interim bailout of USD 6bn from Saudi Arabia, USD 6bn from UAE, and USD 2bn from China – and the recently speculated USD 2bn deferred LNG payments to Qatar – has kept it afloat with FX reserves kissing 7 weeks of imports. However, for sustained economic comfort, it is imperative that the government secures an IMF package and provides clarity to the markets, investors and analysts.
Equally, but marginally less, worrying is the FATF’s evaluation of Pakistan’s classification in the grey-list. The government has taken several measures to significantly improve financial structures to reduce money laundering – yielding political brownie points – however a best-case scenario still hinges on the Pak-US relationship. President Trump’s belligerent attitudes seem to have mellowed somewhat as Pakistan facilitates the extrication of US forces from Afghanistan but rapid changes in the US’s Pentagon and military leadership is creating ambiguity. Privately, the US has stated that it enjoys near-veto powers in the IMF, and insists that US dollars must not be channeled to China. However, such concerns may be allayed by a statement by the US Treasury saying that Pakistan’s debt repayment to China will likely start after the IMF program concludes.
Economically, the numbers are improving albeit at a slow pace. CPI clocked in 6.17% for December, remittances growth was 2% Y/Y and the Current Account Deficit (CAD) was USD 6.1bn in 5MFY19 vs USD 6.8bn in the same period last year. That said, a 33% depreciation and 425bps monetary tightening has begun to show an improving trend and as per our expectations – assuming oil below USD 60 – the CAD can normalize to 2.5-3% of GDP in less than a quarter. Backup plans such as the government’s efforts to explore other avenues of financial support are necessary, especially in the highly unlikely scenario of IMF talks collapsing. With this in mind, the government has recently announced a Diaspora Bond offering USD 5 – 5.5% per annum and is introducing the Panda Bond. Nonetheless, to create confidence among investors and other multilateral lenders such as the World Bank, Asian Development Bank etc., the IMF’s nod of approval is crucial to deflect the hanging sword.
Looking ahead, in January 2019 we should have put the worst economic adjustment behind us, or virtually all of it. FDI from UAE and Saudi Arabia in an oil refinery in Gwadar, investment is speculated at USD 6-8bn, will create positivity as will the talks with the IMF, scheduled for the third week of January. The Finance Minister is also expected to introduce a mini-budget to address fiscal and external challenges in the country now that he has dug deep into economic numbers. Symbolic measures such as the recommencement of British Airways, Portugal’s removal of a travel advisory on Pakistan, the Prime Minister’s focus on improving ease of doing business and clamping down on poor governance will yield results in the medium term. The quick-fix requires an IMF bailout but not at the cost of the country’s growth trajectory. After two consecutive years of stock market decline – an unusual occurrence for Pakistan – we are starting from a low pessimistic base but are optimistic about closing the year on a much better note.
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