The Fund rose 5.5% during the month, compared to MSCI Pakistan IMI Net TR (SEK), which rose 4.9%. It was a quiet month in Pakistan with relatively small sector deviations (2-7% movement within sectors). In January, the Fund’s outperformance primarily came from the IT company Systems, which rose 21% in a fairly calm market. Positive contributions were also received from our positions in Meezan Bank and the packaging material manufacturer Century Paper. Negative contributions accrued from our underweight in the fertilizer industry (primarily Fauji Fertilizer). During the month, we added our first exposure in the automotive industry through the purchase of Pak Suzuki Motors. This will initially be a smaller exposure as we believe the sector will continue to have a tough time during the major part of the year. The share price is trading about 80% (SEK) lower than peak levels and expectations are reasonably low at this stage. The stock has a history of high beta which is interesting to us at this stage of market development. We like its positioning in the smaller car segment as it, at least initially, is likely to be less competitive than for larger cars. For example, we will not see any Indian car manufacturers in Pakistan in the near future. The comparison with India is particularly interesting. Suzuki car manufacturing in India (Maruti Suzuki) is also listed. The valuation of the Indian company is about 2.5x sales while the corresponding valuation of Pak Suzuki is about 0.15x. As we said, it is an early exposure with high risk and the initial position (1.5%) is in accordance with that view.
In January, MSCI Pakistan IMI Net TR (SEK) rose by 4.9%, MSCI FMxGCC Net TR (SEK) rose 3.3% and MSCI EM Net TR (SEK) fell 1.8%. The latest gains on the benchmark index extended the monthly streak to five (38% up since end Aug’19). Although still absent from the equity market foreigners continued to invest in the treasury bill market. During the month, inflows amounted to USD 538mn in treasury bills which is the highest amount received in a single month to date. This, together with other inflows in government securities, have cumulatively attracted over USD 2.9b since the end of June 2019, against the government expectations of USD 2.0b for FY20 (ends June 30th, 2020). These inflows partially explain the improvement of FX Reserves, which increased from USD 7.3b at the end of Jun’19 to USD 11.9b as of 24th Jan’20. The latest available Current Account figure shows that in Dec’19 Pakistan registered a deficit of USD 367mn, the figure is very much alike Nov’19; but the deficit is massively narrowed by 80% YoY. This improvement was supported by compression in imports (-19.7% YoY) and growth in remittances (+20.0% YoY) and exports (+5.9% YoY).
Before the end of January, the SBP (the central bank) revealed the monetary policy for February and March where its committee decided to keep rates on hold at 13.25%. This decision was widely expected by the market participants. In its latest monetary policy statement, the SBP signalled on revising down GDP growth rate projections (at around 3.5%) due to below expectations in cotton production. Besides this, the SBP has kept its inflation outlook unchanged at 11-12% for FY20 but adopted a more cautious narrative, which highlights near term risks to inflation from ongoing food price shocks and a potential increase in utility prices.
At the time of writing this monthly letter, the inflation number for Jan’20 was released at 14.6% against the market expectations of 13.6%. The significant jump on MoM basis (12.7% for December) was attributable to a sharp increase in certain perishable and non-perishable goods. Also, the quarterly house rent adjustment and the increase in fuel (primarily LPG) prices contributed to an increase in inflation during the previous month. The market reacted negatively (-2.9% on the 3rd of February 2020) to this figure that indicates a change in the base case for a rate cut, which was earlier expected in March. Also, the latest SBP survey of economic expectations shows that the majority of market participants now expect a rate cut earliest Jul’20.
The Financial Action Task Force’s (FATF) Working Group meeting in January has reportedly expressed satisfaction, unlike last time, over the compliance report submitted by Pakistan. Plus, a similar evaluation was rendered by a diplomat from Washington while on a trip to Pakistan.
Even though the recent positive feedbacks have raised the probability of Pakistan exiting the grey list in February, we believe there is still an overwhelming probability for Pakistan’s exit from the FATF watchlist earliest in June 2020. The FATF meeting will be held on February 16-21st. In February, we will also have the results for the second quarter fiscal year 2020 (and for some companies fourth quarter 2019). We expect to see improvements primarily in banks’ results while cyclical sectors are likely to continue to paint a picture of struggling market circumstances. We believe this is a consensus view and would thus be surprised to see significant movements for individual sectors as a result. Overall, although we believe we are early in a positive market cycle, we expect the market to stay range bound pending new triggers.
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