During the month, the fund went down 2.5% as compared to the benchmark’s MSCI Pakistan Net (SEK)’s return of -4%. (all changes in SEK)
In October, the fund reduced its exposure slightly in Information Technology, Financials and Pharmaceuticals. Exposure was trimmed with the intent to capitalize on the recent out-performers in order to remain concentrated in conviction bets, which are temporarily facing valuation dents. We also sold our position in the unlisted Pakistani consumer conglomerate International Brands during the month. After the company’s contemplated listing was delayed, we have been looking for an alternative exit for a long time. There remains a certain risk in the repatriation of cash (requires, among other things, the approval of the central bank). If nothing unexpected happens, the position will be realized with a small profit versus the invested amount. No new companies were added during the month.
October did not offer the government any respite from tough decisions. Amidst falling FX reserves to 6 weeks’ worth of imports, Finance Minister Asad Umer had his hands full with formulating an external financing strategy and trying to appease anxious investors. Statements, such as, “all options including IMF are being studied” did not offer investors clarity, many of whom were desperately waiting for signs of improvement. In the meantime, the KSE-100 Index nose-dived to ~36,500 levels only to recover more than 12% as the Prime Minister’s visit to Saudi Arabia’s “Davos in Desert” yielded positive results. In an attempt to shore up its public image, Saudi Arabia offered Pakistan a USD 3bn deposit for 1-year, in addition to a USD 3bn oil-credit facility. Investors and analysts heaved a deep sigh of relief at this bit of welcome news.
Following Saudi Arabia’s lead, the United Arab Emirates (UAE) also sent a team to Pakistan to hold discussions with economic (and military) managers. In all likelihood, these discussions will produce similar statements of support coupled with financial investment/loans e.g. most probably for setting up an oil refinery near Gwadar Port. As we write this note, the Prime Minister Imran Khan is embarking on his first official visit to China. He will participate in the China International Import and Export Exhibition as a “guest of honor” where he is expected to be showered with a combination of: reduction in duties on exports to China, short-term currency loans, joint venture projects, and possibly, offers to relocate certain industries plus technology transfer to Pakistan. We believe that this visit will set the tone for the next of China Pakistan Economic Corridor (CPEC), under the Belt and Road Initiative (BRI); the key focus will be Pakistan’s re- industrialisation after the conclusion of heavy infrastructure and energy projects. China, in a bid for transparency and to mute criticisms of its presumed influence in the BRI universe has also welcomed IMF’s evaluation of Pakistan’s loans.
Another important news item to impact the market will be the IMF’s visit (7th November onwards). The Finance Minister has in principle shown his inclination to accept the IMF’s program and several reforms measures have already been implemented; the currency shed ~7% vs USD this month along with September’s 100bps increase in the Discount Rate and more tightening by the end of this month. While it is unclear what the IMF’s conditions will be; it is very clear that they will have geo-political strings attached. The government has also taken tough but necessary measures to increase gas and electricity prices while trying to minimize their impact on 70%-90% of the population that falls in the low-income category.
Team Pakistan Tehreek Insaf (PTI), the ruling party, is determined to enact structural reforms to improve governance – it has honed in on improving tax collection, closing loopholes for money laundering, and highlighting political accountability. Shahbaz Sharif, the leader of the opposition and former Chief Minister of Punjab (and the former P.M.’s brother), is under investigation by National Accountability Bureau. Asif Ali Zardari, the defacto head of the Pakistan People’s Party and a former President (2008-2013) is also being investigated for his alleged links with business groups who facilitated money-laundering in Pakistan. The waves of reform continue with the Federal Bureau of Revenue (FBR) investigating individuals conducting high-value cash withdrawals and credit card purchases, buying luxury vehicles, receiving high rents etc.
These actions, however commendable, will yield results over the next few years, but there are more pressing downside triggers around the corner: (i) MSCI’s review where two blue-chip companies (Lucky Cement and United Bank Limited) could be out of the Index for not meeting certain quantitative criteria may lead to further foreign outflows; and (ii) the Asia Pacific Group’s (APG) draft report is out with serious reservations over the non-implementation of Financial Action Task Force’s (FATF) recommendations after Pakistan’s grey-listing. These two events could, in the short run, bring pessimism back into the market despite attractive valuations. November promises more on the IMF’s programme and hopefully, further improvement in the Current Account Deficit which clocked in at USD 950m in September (annualized 4% of GDP).
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