During the month, the Fund went up 7.1% in SEK as compared to the benchmark MSCI Pakistan Net (SEK)’s return of 18.1%. Part of the underperformance can be explained by lack of holdings in the energy sector, which performed strongly during the month. Also our overweight in Materials, primarily Cement, partly explained some of the relative losses. The unusually large deviation from the benchmark however stems from MSCI’s deletion of two of the members (United Bank Limited and Lucky Cement) due to technical reasons and that the benchmark now only consists of three members (Oil & Gas company OGDC and the banks Habib Bank and MCB Bank), each weighing between 30% and 35%. All three stocks rose significantly during the month as blue chips led the way. Provided that January’s rise proves lasting we expect the rest of the market to gradually follow and narrow the performance gap. The continuous narrowing of our legacy benchmark however accentuates the question of its current relevance. Since June 2017 the number of constituents in MSCI Pakistan Net TR index has been reduced from sixteen to now only three. We have therefor taken the decision to change benchmark to MSCI Pakistan IMI Net TR index on April 1st, 2019, which is composed of 25 constituents and better reflects the investable universe for foreign investors going forward
The month started off on a good note. Although, the January Effect has been taught in Financial Markets 101 textbooks, this time it was the beginning from a very low-base. Pakistan, unusual for its own standards, depicted two consecutive years of USD return declines as the country battled with external finance pressures coupled with heated political transition. However, navigating through the storm with ~33% currency depreciation and 450bps of Monetary tightening, the worst does seem behind us, for now.
The friendly loans did keep the FX reserves, and the economy, afloat in this current Fiscal Year. USD 4bn have already been utilized from Saudi Arabia + UAE (with USD 2bn and USD 6bn Oil Credit Facility remaining). As we upload the monthly reports, the talk-of-the-town has it that China is willing to lend another USD 2.5bn to keep the reserves above 6-7 weeks of monthly imports. The Finance Minister, Asad Umar, reportedly has done a reasonably good job in reducing the IMF bailout from say a painful recessionary USD 20-25bn bailout to perhaps less than USD 10-12b. The rumor has it that the government shall soon (this month or so) sign an IMF bail-out package at reasonably better terms than those cash-starved scary examples in other frontier markets.
What triggered the jump from the low levels of KSE 100 Index was an almost 20% YoY improvement in the trade deficit in December. It seems certain that the economic adjustments – monetary and fiscal – have finally led to a reduced run-rate of currency outflows. In a recent interaction, the Finance Minister has said to have noticed even better YoY improvement in Exports (9%) and Imports (-20%) up to January 20th 2019. At this pace, we’re all-set to see a double-digit export growth in February 2019’s numbers, that should instill further confidence to the investors.
However, the adjustment’s pain is beginning to be felt. Cement Sales are down 20% YoY; Chinese hard-landing’s lower coal prices have kept the equity values intact nonetheless. Inflation is recorded at 7.2% in January and pro-active monetary tightening of 25bps last week has kept the economy close to balance signaling that interest-rates are about to peak-out. Similarly, Oil sales have also registered decline owing to ban on use of Imported Furnace Oil amidst rising competition eating the market share of listed Oil & Marketing Companies.
That stated, economic reforms are being taken for medium term growth. In the latest Economic Reform Package, the government has reduced duties on raw materials such as Plastic, Paper, Home appliances, Leather, and Auto sectors. The intent is simple; re-industrialization of the economy with a clear tilt towards USD-earning exporters. Globally renowned firms, such as Cargill International, have committed to invest USD 200mn in the economy with similar commitments from other players. Moreover, the February visit of the Crown Prince of Saudi Arabia, Muhammad Bin Salman is expected with much fanfare and investment deals over USD +10bn in a Refinery and Petrochemical complex to keep the animal spirits alive. We believe the earnings season would show the embedded margin compression and sales decline for most cyclical sectors which should be out-weighted by already-incorporated cheap asset-values coupled with improving economic prospects witnessed in the external financing sector. Signing the IMF deal by next monthly write-up should end prolonged uncertainty witnessed by investors, including us.
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